Investment Advisor (IA) is an informal designation describing a person or firm in the United States who has registered with the U.S. Securities and Exchange Commission or state regulatory agency (where the primary business is situated or multiple States in some cases) in connection with the management of the investments of others. The proper designation for a person so registered would be "An Investment Advisor registered with the SEC" (or a specific state if so registered).
By definition an investment advisor is considered to be acting in a fiduciary capacity on behalf of clients with a higher standard of disclosure and due care, a commitment to disclose, minimize and resolve conflicts of interest than would be found in a traditional securities brokerage environment. In addition, most IAs are compensated on a fee basis (usually as a percentage of assets under management) rather than a commission basis.
In general IAs managing assets totaling less than $25 million must register with each state in which they have more than 5 clients. Firms managing more assets can register nationally with the Securities and Exchange Commission. Registration can be a complex process, taking longer than a month and costing several hundred dollars in filing fees, depending on the state or SEC. Registration requires that all employees of the IA (except those limited to clerical duties) pass the FINRA Series 65 exam or have completed an approved professional designation.[citation needed]
Registration does, however, cause one to become legally responsible for the investment advice given[citation needed], requiring more disclosure to existing and potential clients, filing of periodic reports with various regulatory bodies and to keep longer, more accurate records of the financial advice given to clients.
Investment Advisors vs. Broker-Dealers
Release 34-51523 determined that broker-dealers are "not to be deemed investment advisors." Due to the liability associated with being an investment adviser, many larger brokerage firms (such as Merrill Lynch and UBS), have discontinued their usual practice of providing financial advisory services, rather than register their broker-dealer firms as they would otherwise be required to do in accordance with recent changes in investment law. (As revealed in the article "False Fiduciaries" by Bob Veres, found in the May 2006 issue of Financial Planning.)
Brokerages that do not register their representatives as IAs (under a separate internal investment advisory firm usually closely related to the brokerage firm) are therefore required to have disclosure statements on all of their new account forms, essentially explaining that their interests are not necessarily the same as their clients' best interests, and they may also be compensated from the owners of the investment products they are offering for sale.
This is because, unlike an attorney or Certified Public Accountant, a registered representative of a securities broker-dealer firm does not necessarily have a fiduciary relationship with the client under the regulatory structure of US Securites laws. This is not to suggest a securities broker-dealer firm has no fiduciary relationship, however, as attorneys representing plaintiffs have argued (successfully at times) that in fact securities firms do have some types of fiduciary responsibility to their customers.
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