Everything You Should Know About Investment Advisors

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Aja McClanahan is a personal finance writer who has a story of getting out of over $120,000 in debt. She's been featured in Yahoo! Finance, MarketWatch, U.S. News and World Report, Kiplinger and has written for publications like Business Insider, Credit Karma, Inc., and many others. Aja writes about investing and personal finance for Wealthsimple. In her spare time, she manages her own investment portfolios for herself, husband, and two kids. Aja double majored in Spanish and Economics and holds a Bachelor of Arts degree from University of Illinois at Urbana-Champaign.

If you’re looking to get your finances in order and finally start investing like you’d always promised yourself, it’s likely that you don’t know where to start. If that’s the case, you might need some help.

An investment advisor can guide you towards creating the ideal investment portfolio that aligns with your financial goals. Here’s what you should know about investment advisors.

What is an investment advisor?

An investment advisor gives you advice on investing in securities like stocks, bonds, and mutual funds. Investment advisors can help you select stocks or even manage your investing portfolio.

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According to the SEC, “Money managers, investment consultants, and financial planners are regulated in the United States as “investment advisers” under the U.S. Investment Advisers Act. The SEC defines an investment advisor as, “Any person or firm that… is engaged in the business of providing advice to others or issuing reports or analyses regarding securities.”

Individuals that offer investing advice are called investment advisor representatives (IAR) while the firms they work for are designated as an investment advisor. According to the North American Securities Administrators Association (NASAA,) IARs are characterized by the following activities :

  • Providing advice or analysis about securities

  • Receiving compensation for the advice they provide

  • Engaging in regular business of providing advice about securities

There are various regulatory requirements for becoming an IAR. Most IARs will have to register with the state where they’ll be operating and pass a number of tests to give investment advice as an IAR. To become an IAR, the following requirements must be in place:

  • Pass the Series 65 exam or the Series 7 in combination with the Series 66 exam. (In some cases, having a designation like a CERTIFIED FINANCIAL PLANNER™ or Chartered Financial Analyst® will allow you to waive the Series 65 exam)

  • Register through the IARD

  • There could be additional registration requirements depending on the state or states where the IAR will operate

Note that IARs can only offer advice on topics about which they’ve passed the corresponding exam. Though an IAR sounds like an independent role, they actually must operate under the auspices of a Registered Investment Advisor (RIA) firm.

What is an RIA?

A RIA is a registered investment advisor. Usually an RIA is a firm but Individual IARs can also open their own RIA. It is very common for an IAR to work for an RIA.

An IRA is an independent “agent” providing services but an IRA must still be associated with a firm, usually an RIA. The RIA can have several employees working for them to manage investing activities. These employees are usually an IAR of some sort.

RIA are fiduciaries, which means they are legally obligated to give investment advice according to the client’s best interest. There are some financial advisory servicers that are not bound by this obligation. For example, broker-dealers only have to comply with a “suitability obligation.” This just means they must reasonably believe that they are providing investment recommendations that are best for their client.

Fiduciaries, however, must:

  • Avoid conflict of interest by recommending higher-commission products despite clients needs

  • Thoroughly analyze investment opportunities to make sure they meet client needs

  • Generally choose the client’s best interest above their own

Also, RIAs are regulated by the Securities and Exchange (SEC.) They must register either with the Securities and Exchange Commission (SEC) or state securities administrators. Where and how an RIA files with the appropriate government authority depends on the amount of assets they have under management.

What does an investment advisor do?

An investment advisor can carry out various activities covered by the types of licensure they have. Investment advisors do offer investment advice but they can also manage investment portfolios. Some investment advisors may engage in financial planning for their clients, too. In some cases. Investment advisors can offer brokerage services. This means they are licensed to buy and sell stocks or bonds.

They should also be able to educate clients and perform a thorough analysis of their investing needs. An investment advisor must also comply with any regulatory requirements pertaining to their activities while adhering to a code of ethics that put their client needs first. A good investment advisor should keep good records and help clients navigate the financial implications of their investing decisions.

How are investment advisors compensated? How much do they cost?

Investment advisors can be compensated in different ways. Some have a commission-based compensation model. This means when they recommend and sell certain types of financial products and services they are paid a referral fee called a commission.

Other investment advisors have fee-based models where they charge clients hourly for their services. This compensation model is becoming more popular, especially as cash-strapped millennials are starting to demand investment advice at growing levels. The model is more affordable and more accessible to people who may not be able to hire an advisor.

Fee-based planners typically charge $75 to $150 per hour. You can ask your investment advisor about their potential plans and how much consulting you might require on a monthly or quarterly basis.

How do I find an investment advisor?

Googling “Investment advisors near me,” can get you started.

Another option is to check with any financial institutions you already have accounts with. For example, some large banks and even some credit unions have private banking departments that employ experts like investment advisors for its banking clients.

Another option is to check around with friends and family. Ask within your network regarding recommendations on investment advisors with whom people have had a good experience.

Finally, there are government registries that keep databases of registered, qualified investment advisors. Because they must register with the appropriate authorities that regulate their activity, the registration database is usually open to the public and searchable online.

Here are some government-hosted registries for varying locations:

Last Updated August 28, 2020

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