Financial professionals are subject to regulation to ensure that they’re following industry standards at all times. Several organizations are responsible for establishing and enforcing financial advisor regulations in the U.S. If you’re interested in a career as an advisor, it’s important to understand the guidelines that you’re expected to adhere to.
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Who Sets Financial Advisor Regulations?
The Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Agency (FINRA) are the organizations that primarily handle financial advisor regulation at the national level. SEC regulations apply to investment advisors. Under the Investment Advisers Act of 1940, investment advisors include:
- Money managers
- Investment consultants
- Financial planners
Section 202(a)(11) of the Advisers Act defines an investment advisor as any firm or person that engages in the business of providing financial advice about securities in exchange for compensation. Investment advisors are required to register with the SEC or their state regulatory agency, depending on their assets under management. Examples of investment advisors include asset managers, investment managers or investment counselors, portfolio managers and wealth managers.
FINRA, meanwhile, regulates broker-dealers, capital acquisition portals and funding portals, which are crowdfunding intermediaries. Certified financial planners, meanwhile, must meet standards set by the CFP Board in addition to any federal or state regulations that may apply.
SEC Financial Advisor Regulations
The SEC sets the rules for when investment advisors must register, how the registration process works and the ongoing requirements they’re expected to meet to maintain their registration status. Advisors are required to register with the SEC when they manage $110 million or more in client assets. Advisors who manage more than $100 million but less than $110 million in client assets may choose to register with the SEC or their state regulatory board.
SEC regulations specify the steps that you’ll need to take to register. To become an RIA, you must do two things at a minimum:
- Complete the Series 65 exam if you don’t have Series 7 and Series 66 licenses
- File Form ADV
Obtaining additional certifications or professional designations is optional, but it could be worthwhile if you’d like to niche down or specialize in offering certain types of services.
Once you’re registered with the SEC, there are additional regulations that apply regarding marketing. SEC marketing rules prohibit advisors from engaging in certain activities, which include:
- Making untrue statements of material facts or omitting facts which result in misleading statements
- Stating factual information that you’re unable to substantiate
- Touting the benefits of an investment without providing a balanced view of its risks or limitations
- Presenting information that’s likely to mislead investors
- Including or excluding performance results in a biased manner
- Failing to properly disclose affiliate relationships in which someone receives compensation for promoting the advisor’s business
- Failing to properly disclose the use of third-party ratings in advertisements
In addition to these rules, registered investment advisors are subject to compliance regulations. Compliance guidelines require advisors to:
- Follow a fiduciary standard in dispensing advice and managing client assets
- Adopt and enforce a written code of ethics
- Implement written policies and procedures that are designed to prevent any violations of rules set by the Investment Advisers Act
- Instituting proper measures for recordkeeping
- Designating a chief compliance officer to oversee the drafting and enforcement of policies and procedures
- Conducting annual reviews of policies and procedures
In short, there are quite a few financial advisor regulations to be cognizant of if you’re required to register with the SEC or choose to do so in lieu of state registration.
FINRA Rules and Regulations
FINRA rules do not apply to registered investment advisors unless an RIA firm’s line of business also extends to broker-dealer services. In that case, it would be subject to FINRA regulations along with SEC or state regulatory guidelines, depending on the firm’s registration status. The primary purpose of FINRA regulation is to protect investors in their interactions with broker-dealers.
There is one thing FINRA does that’s specifically related to investment advisor regulation. It operates the Investment Adviser Registration Depository (IARD), which is where advisors must go to file Form ADV. This document is required for registration, and it includes three parts:
- Part 1 covers information about the investment advisor’s business, including who owns it, the number of clients it services, how many employees it has, its affiliations and business practices
- Part 2 details business practices in more detail, including how the advisor sets their fees, any existing conflicts of interest and relevant disciplinary information. This part, known as the brochure, must be shared with advisory clients.
- Part 3 offers a summary of the types of services the advisor offers, along with the fees clients will pay for those services and any conflicts of interest that may exist.
Investment advisors are required to file this form when they initially register and update it annually.
Why Do Financial Advisor Regulations Exist?
Regulation in the financial services industry exists to ensure that advisors are acting ethically and legally. That offers protection to investors against unfair, deceptive or illegal practices and it also helps lend credibility to the advisory profession as a whole. Advisors who run afoul of regulatory guidelines may be subject to punishments which can include fines and imprisonment.
The Investment Advisers Act was passed to address perceived abuses within the financial services system that were believed to have contributed to the 1929 stock market crash and the economic depression that followed. Additional legislation, such as the Dodd-Frank Wall Street Reform and Consumer Protection Act, exists to extend protections into other areas of the financial services industry.
Bottom Line
Navigating financial advisor regulations may seem daunting if you’re just starting your career, but those rules can’t be overlooked. Both the SEC and FINRA routinely introduce new regulations and guidelines, so it’s wise to stay up to date on the latest guidelines to understand how they may affect your business.
Tips for Growing Your Advisory Business
- Marketing your business online can be a time-consuming process and you may need to test out different strategies to find one that produces results. One option you might consider is using an online lead generation service to increase your visibility. SmartAsset AMP (Advisor Marketing Platform) is our holistic marketing service that financial advisors can use for client lead generation and automated marketing. Sign up for a free demo to explore how SmartAsset AMP can help you expand your practice’s marketing operation. Get started today.
- If your marketing plan includes creating social media content, it may be wise to refresh yourself on SEC marketing rules. For example, if you partner with a blogger or social media influencer to promote your brand and you’re paying them a fee to do so, you’ll need to clearly disclose that in the content and they will as well. Failure to do so could result in fines or other penalties. Running all marketing materials through a compliance officer can help minimize the risk of violating any SEC rules.
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