When you work with an investment advisor, it's under the expectation that they'll provide their expertise, insights, and research to help you make sound investment choices. They have specific legal responsibilities and qualifications and shouldn’t be confused with the broader term financial advisor, which can cover a range of professionals such as tax accountants and estate planners, even stock brokers.
What does an investment advisor do?
An investment advisor, according to the Securities and Exchange Commission (SEC), is a professional or company that provides certain kinds of investment advice to others or issues reports on securities.
Investment advisors have a fiduciary duty. This means that by law, they manage investment portfolios in a manner that is supposed to best serve a client's interests. In practice, this means placing the interests of the client ahead of their own.
Investment advisor duties include offering guidance on the value of different securities—such as stocks, bonds, mutual funds, and exchange-traded funds—as well as providing research and recommendations on which securities to buy and sell.
An investment advisor can be an individual or investment advisory firm. These professionals typically work with high-net worth individuals or those with liquid assets of $1 million or more.
An investment advisor may be able to exercise what's known as discretionary authority. This means that as the client you're granting them full agency to sell, trade, and perform other actions on your behalf. As the theoretical driver, they have authority to make decisions while managing your investments.
Investment manager vs. investment advisor
You may have seen the terms "investment manager" and "investment advisor" tossed about. The difference between an investment manager versus an investment advisor is an investment manager may build and manage your accounts and investment portfolio. An investment advisor may also manage your investments, or provide recommendations on what investment moves to make. Some do both.
Registered investment advisors
A registered investment advisor (RIA) is an investment professional who is registered with state securities authorities or the SEC. When an investment professional or firm has at least $25 million in assets under management (AUM), they can register with the SEC. Otherwise, they can register with the state securities authorities.
How investment advisors get paid
Investment advisors get paid in a number of ways. They may receive a flat fee, which may be charged based on a monthly rate or a percentage of assets under management. They could also be paid a salary, charge an hourly rate, or a combination of both.
Here’s how much each form of compensation might cost you:
- Hourly rates—Investment advisors, like lawyers and accountants, are trained, licensed professionals, and their rates can be in the same ballpark. Consider $100 an hour as a starting point.
- Retainer fees—This usually is an annual charge equal to a percentage of the assets under management. They typically range from 1% to 2%, with the rate dropping the bigger the investment portfolio. For the largest portfolios, the rate is negotiable. This is the most common form of compensation among investment advisors.
- Flat fees—These are mostly based on your net worth. A simple one-time consultation might cost as little as $500, but usually it will be a good deal higher in an ongoing relationship.
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Investment advisor vs. financial advisor
Here are a few key differences between investment advisors and financial advisors:
- Fiduciary standard vs. suitability standard. Investment advisors are held to the fiduciary standard, and financial advisors are held to the suitability standard. While a fiduciary standard equates to an advisor always putting their clients' best interests before their own, a suitability standard means that guidance and transactions are suitable for the client. Some financial advisors who offer investment advice, such as certified financial planners (CFP), are held to the fiduciary standard, while others, such as brokers, are not.
- Registered with the SEC. Investment advisors must be legally registered with either the SEC or a state regulatory authority. Financial advisors do not have this requirement.
- Pass the Series 65. Registered Investment Advisors are also required to pass a test to hold a Series 65 license, allowing them to charge for offering investment advice and other services. The test, which is administered by the Financial Industry Regulatory Authority, ensures that those who pass it are familiar with state and federal securities regulations, industry ethics and fiduciary responsibilities.
Note: Other types of financial advisors, such as certified financial planners and chartered financial analysts, also are required to take qualifying tests, plus have as much as four years of relevant work experience. They do not need to hold a Series 65 license, unless they plan on giving investment advice.
- Offer more in-depth investment advice. Although certain kinds of financial advisors can offer investment advice, it typically isn't as in-depth as what an investment advisor provides. Financial planners are usually also involved in different aspects of money management, while an investment advisor strictly provides guidance, reports, and analyses on investments.
There are other key differences between the roles including:
- Investment advisors give advice that is confined to investment decisions and the types and kinds of securities to buy and sell. They are required to adhere to a fiduciary standard, placing their client’s interests ahead of their own.
- Financial advisors offer advice on a person’s broader financial picture, including retirement and estate planning, saving for a child’s college, spending, insurance, tax strategies and a host of other financial issues. Financial planners are not required to meet the fiduciary standards, though those who are certified financial planners must.
Investment advisor vs. broker
A broker will need to pass different tests, known as Series 6 and Series 7, which allows them to sell securities and investment products. Brokers, a type of financial advisor, are more hands-on and do the trading, while an investment advisor offers information and makes recommendations.
Brokers also buy and sell securities for their customers. They operate under the suitability standards, which is less stringent than the fiduciary standard. This means they can select investments that offer them the highest commission, provided it is considered suitable for the customer.
Why use an investment advisor?
Working with investment advisory services and having an investing professional in your corner is one of many options to help you with your investments. If you're busy juggling a career, raising a family, and managing other pursuits and commitments, you may not have time to stay on top of trends in the stock market. Working with an investment advisor may help whittle down the time spent to make informed investing moves.