An investment advisor (or investment adviser) is an individual or firm that advises clients on investment matters on a professional basis.
They tend to fall into two distinct categories:
- investment advisors offering direct financial advice to individuals or businesses, or
- investment advisors offering asset management for (typically) corporate clients, hedge funds and/or mutual funds.
Depending on the nature of the relationship, investment advisors charge fees calculated as a percentage (e.g., 1%) of assets under management (see: fee-only financial advisor), on an annual basis, an hourly or on a "flat fee" basis.
United States
In the United States, a firm registers as an investment advisor with the Security and Exchange Commission (SEC) or a state, depending on the amount of assets that receive continuous and regular supervisory or management services (Assets Under Management, or "AUM"). For a firm to register with the SEC, it must have over $25 million of AUM at the time of registration or within 120 days of the effective date of the registration. If a firm has less than $25 million of AUM and doesn’t anticipate having $25 million or more within 120 days of the effective date of the registration, then it must register with the individual state(s) as an investment advisor. If a firm has $30 million or more of AUM, then it must register with the SEC. Firms with more than $25 million and less than $30 million of AUM can be registered with either the state or SEC. The SEC’s definition of AUM is outlined in the Form ADV Part 1 and should be thoroughly reviewed and consulted prior to beginning the registration process.
Common examples of investment advisors include pension fund managers, mutual fund managers, trust fund managers and also individuals, partnerships, or corporations that have registered under the Act, and those who fall within certain exemptions. Stock brokers (known as "registered representatives" under U.S. federal law and licensed in the various states) are not necessarily (and normally are not) registered investment advisors.
In general, under U.S. law, investment advisors owe their clients an ongoing fiduciary duty to provide full and complete disclosure of all fees, conflicts of interest, and if so authorized, to exercise discretion in selecting investments with only their clients' best interests in mind.
In many cases, a registered investment advisor (RIA) is a corporation or partnership while the person actually providing the advice is an investment advisor representative (IAR) of the advisor organization. Investment advisor representatives and individuals registered as investment advisors are sometimes certified as a Certified Financial Planner (CFP) practitioner by the Certified Financial Planner Board of Standards, Inc. [3] or a Chartered Financial Analyst(CFA) holding a charter from the CFA Institute [4] after they have passed the appropriate examinations, have agreed to abide by a code of ethics, and have maintained the required continuing education credits. The CFP and CFA credentials are not, however, required for registration as a registered investment advisor.
The registration process to become an investment advisor is becoming increasingly complex, with examination requirements, books and record retention and increased state regulation of smaller investment advisors.[1][2]
United Kingdom
In the United Kingdom investment advice is given either by a financial advisor or a stock broker.
Financial advisors need to pass an exam and receive a Financial Planning Certificate, and are authorised by the Financial Services Authority, a UK government qango that must be satisfied the advisor is a “fit and proper person” before they may practice.
Financial advisors are either tied, multi-tied, or independent.
As the classifications suggest, tied advisors can only recommend financial products marketed by the company they represent. Typically that company employs them but in some cases they work for that organisation under a type of self-employed contract that usually precludes other paid work.
Multi-tied agents perform a similar role, except they represent a number of different companies. This is sometimes referred to as the panel system.
An Independent Financial Adviser must offer whole of market advice and, in addition, must offer prospective clients the choice of paying a fee for advice, rather than being remunerated via commission from the financial product provider. Tied and multi-tied advisors are nearly always rewarded via commission, though in some cases (and if the advisor is employed rather than self employed) commission may be expressed in notional terms to justify a salary.
In the UK there has been much debate in the media about the effectiveness of financial advisors, especially in situations where there is perceived bias toward certain products that offer high commission.
There are issues of client accountability, as the advisor — either tied or independent — has a moral duty to achieve this for clients. Best advice is difficult to achieve if the advisor is not independent; therefore a type of compromise exists where a tied or multi-tied advisor must recommend the most appropriate financial product available to suit their clients needs, even if a more appropriate product is available in the market place.
In the UK many believe impartial advice can be obtained only by consulting an independent financial advisor.
See also
References
External links
- AAFM American Academy of Financial Management
- IAIA International Association of Investment Advisers
- AIFA Association of Independent Financial Advisers - UK Trade body
- FSA website Financial Services Authority (UK)
- IAA Investment Adviser Association
- NAIFA National Association of Insurance & Financial Advisors
- SEC IA Search SEC Database of US Registered Investment Advisers
- SECLaw.com Financial Advisor Legal Information Center
- €FPA €uropean Financial Planning Association
