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Let’s dive deeper into what an Investment Advisor is, what they do, and how they can benefit anyone looking to grow wealth over time. Investment advisors can go by several titles but managing investment activities for an ongoing fee is at the heart of all of them.
What Is an Investment Advisor?
The term investment advisor doesn’t automatically specify whether we’re talking about an individual or a company. Rather, “investment advisor” is a function or service offered by either an individual or a large group of people working on behalf of a client.
In almost all cases, an investment advisor should denote themselves professionally as a Registered Investment Advisor, whether they’re an individual or a firm. Adding the “Registered” in front lets you know that they are registered with the SEC and in states where they do business. Registered Investment Advisors manage investments on behalf of clients for a fee, typically an asset-based percentage fee of between 0.25% – 1.25%.
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How Investment Advisors Work
Investment Advisors offer advice and management over individual investment securities and funds of various asset classes (stocks, bonds, commodities, derivatives, real estate) – anything that is traded in the financial markets and available to be custodied under one account umbrella at a brokerage or asset management firm.
To formulate a customized investment plan, most investment advisors will incorporate a client’s specific investment objectives regarding risk tolerance, time horizon, etc. Larger investment advisory firms and online robo-advisors will tend to have pre-structured investment profiles that clients can enter into according to their individual preferences.
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Who Must Register as an Investment Advisor?
Anyone who manages the ongoing investment activity of an account or group of accounts for another party – and for a fee – must register as an Investment Advisor with both the Securities and Exchange Commission (SEC) (if managing over $110 million in aggregate), and in any states where they operate.
Firms that manage assets for clients must register on a firmwide level, and any individual portfolio managers who make buy/sell decisions on behalf of employers with over $110 million under management must also register individually with the SEC. There may also be additional registration requirements to comply with organizations that manage accreditations like the Chartered Financial Analyst (CFA) designation.
How Much Do Investment Advisory Firms Cost?
Fees will vary based on the amount of investment assets being managed, the portfolio’s composition(s), and the specific investment strategy being undertaken. Fees will almost exclusively be asset-based, which means a flat percentage of the managed assets are paid to the investment advisor per year.
Asset-based pricing helps to align the incentives of the Investment Advisor with your own incentives. Both parties want to see the account(s) grow; the advisor can’t earn a penny more than the year before unless they grow the account.
Most asset-based fees for investment advisory run between 0.25% – 1.0% per year. The larger an individual account is (say, for high-net-worth investors), the more likely the account will be managed at the low end of the fee range. Also, robo-advisors and auto-advisory platforms will tend to charge lower fees as there’s less human interaction needed to manage the account daily.
Is an Investment Advisor Worth the Cost?
This will depend on several factors, chief among them being the amount of assets you’re looking to have advised upon. It’s worth noting that whether you’re using an investment advisor or just buying an ETF commission-free on a brokerage site, you’re still paying an investment advisory fee.
All funds charge fees – mutual funds and ETFs. Yes, these fees will almost always be lower than what a proper Investment Advisor will charge per year, but any grouping of stocks, bonds, or anything else will come with a fee.
Most people want to outsource some or all of their investment management decisions – most people don’t want to spend dozens of hours per month doing it themselves. So, at fee structures of less than 1% per year, with the potential to have vastly better decisions made on your money’s behalf – this cost is worth it to almost everybody.
Financial Planners vs. Investment Advisors
Financial Planners, such as those who carry the Certified Financial Planner (CFP) designation, will focus more on advisory services like retirement planning, college planning, and estate planning for their clients. Yes, CFPs can also suggest and advise upon specific investment funds and products, but this is typically the purview of the Investment Advisory role.
Investment advisors, meanwhile, spend most of their time on the details of portfolio management and the selection and often spend very little time with clients themselves other than to update their investment objectives or coordinate account transfers.
Some professionals have obtained both the CFA and CFP designations, and they can offer a full suite of financial planning and investment advisory services.
How to Choose an Investment Advisor
The best way to choose an investment advisor is first to decide how many investment assets you wish to place with one manager. Smaller amounts could dictate that a robo-adviser or platform (online-only) strategy could be best for you and save you money in fees.
Larger accounts, family trusts, and monies that you want high-touch, customized service would be best managed by a Registered Investment Advisor. You can find an advisor specializing in investment styles you like or that adhere to social governance values you align with – there is a multitude of RIAs who can cater to every investor’s desire, risk tolerance level, and fee accommodation.
What Qualifications or Licenses Must Investment Advisors Have?
The specific terms of what an Investment Advisor comprises were laid out by the SEC in the Investment Advisers Act of 1940. If an advisor has more than $110 million under management, they must register with the SEC and update them each year on total assets under management and portfolio managers who make decisions for those assets.
Most portfolio managers for a Registered Investment Advisor will have the Chartered Financial Analyst (CFA) designation, although some may have securities trading licenses such as the Series 6, 7, or 63. The CFA institute has mandatory work experience and secondary education prerequisites for obtaining a CFA charter. Each state where an investment advisor operates has its own reporting requirements.
Is it Safe to Use an Investment Advisor?
Registered Investment Advisors are highly regulated both nationally and by the state; they have legal obligations to act as fiduciaries and are safe to work with. Beware anyone posing as an Investment Advisor without representing themselves as a Registered Investment Advisor or a Chartered Financial Analyst (CFA).
Which Is Correct, Financial Advisor or Financial Adviser?
Both spellings are correct – a qualified financial professional can refer to themselves as either an “advisor” or an “adviser.” We tend to see more “advisor” spellings in Europe and in some wealth management/high net worth contexts. Why? There’s no particular reason other than the “advisor” spelling is more of an Old English version, and some people think the “o” versus the “e” gives an extra cache to the word.
But here in the U.S., the Securities and Exchange Commission (SEC) first outlined what an investment adviser is and how they must register with the SEC and in the states where they operate. In the Investment Advisers Act of 1940, the SEC uses the “adviser” spelling.
Bottom Line: What Is an Investment Advisor?
An Investment Advisor manages portfolios of investment securities on behalf of clients for a fee, typically a flat percentage of the assets under management. Investment Advisors have many different styles and strategies, as investor needs vary greatly among age, risk tolerance, time horizon, and account size.