What Is the Definition of Investment Advice?

Investment advice generally refers to recommendations or guidance about securities, including whether to buy, sell or hold an investment. Under federal law, a person or firm may be considered an investment advisor when they provide advice about securities as part of a business and receive compensation for doing so. For financial advisors, the definition can help distinguish regulated advisory activity from general financial information, education or other services.

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Understanding What Investment Advice Is

The SEC defines an investment advisor as “a natural person or company that, for compensation, is engaged in the business of providing advice to others or issuing reports or analyses about securities.” Investment advisors include money managers, investment consultants, financial planners, general partners of private funds and other individuals who receive compensation for providing securities investment advice.

Here’s a breakdown of what is and is not investment advice. Common examples include:

What Investment Advice Is	What Investment Advice Is Not
Recommending buying, selling or holding specific securities or categories of securities	Providing objective historical or statistical information without selecting data to imply a recommendation
Recommending asset allocations involving securities or a curated list of securities	Advice on non-securities assets, such as physical commodities, precious metals, coins or certain real estate
Advising clients on market trends	Providing general facts without recommending a security, securities strategy or course of action
Recommending hiring or retaining another investment advisor	Sharing public financial facts and raw market data without organizing them into advice
Discussing the advantages of securities over investments such as real estate or precious metals	Publishing content with financial information but no specific investment advice

Additionally, a person or firm generally must provide that advice as part of a business and receive compensation to meet the federal definition of an investment advisor.

Not every discussion about money, markets or investments constitutes investment advice under the Investment Advisers Act of 1940. The distinction generally depends on what information is being provided and whether it concerns securities. A financial advisor may therefore provide certain information without that information, by itself, satisfying the SEC’s “advice about securities” element.

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Investment Advisor Compliance Rules and Regulations

Investment advisors operate under a combination of federal and state securities laws. The rules that apply depend on the firm’s registration status, services and business practices, but financial advisors should be familiar with several core requirements:

Investment Advisers Act of 1940: Establishes the primary federal regulatory framework for investment advisors, including anti-fraud provisions and fiduciary obligations to clients.
Form ADV: Registered advisors use this form to register and disclose information about their business, services, fees, conflicts and disciplinary history.
Compliance Rule (206(4)-7): Requires SEC-registered advisors to maintain written compliance policies and procedures and review them annually.
Marketing Rule (206(4)-1): Governs advertisements, testimonials, endorsements, performance presentations and related marketing practices.
Books and Records Rule (204-2): Sets recordkeeping requirements for advisory firms.
Code of Ethics Rule (204A-1): Requires SEC-registered advisors to maintain and enforce a written code of ethics.
Custody Rule (206(4)-2): Establishes safeguards when an advisor has custody of client assets.
Regulation S-P: Governs privacy and safeguarding of customer information, including data-breach response requirements.

State securities laws and investment advisor representative requirements may apply in addition to federal rules. For example, IARs are subject to continuing education requirements in states that have adopted NASAA’s IAR CE model rule.

Frequently Asked Questions (FAQs)

Do Investment Advisors Need to Register With the SEC?

Investment advisors must register with the SEC when their assets under management (AUM) reach $110 million. Advisors with AUM between $100 million and $110 million may choose to register with the SEC or state regulator. When AUM is below $100 million, advisors register with the state.

Is it Illegal to Give Investment Advice Without a License?

Providing securities advice for compensation as a business generally requires appropriate investment advisor or investment advisor representative registration, unless an exclusion or exemption applies. Series 65 is a common examination requirement for representatives, but states may accept alternative qualifications or waive the exam for certain credential holders. Passing an exam alone does not complete registration.

Can You Give Investment Advice as a CPA?

A CPA may provide investment advice without investment advisor registration when that advice is solely incidental to the practice of accounting. A CPA who provides securities advice as a separate advisory business may need federal or state registration unless another exclusion or exemption applies.

Bottom Line

Advisors, Take Note: SEC Eyes Definition of 'Investment Advice'

Investment advice can include a wide range of recommendations involving securities, from specific buy, sell or hold decisions to broader guidance about asset allocation, market trends and investment strategies.

Whether a person or firm is acting as an investment advisor depends on factors such as the nature of the advice, whether it is provided as part of a business and whether compensation is received. Financial advisors should also understand the federal and state rules that govern how investment advice is delivered, marketed and documented.

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Review marketing before publication. Websites, social media, testimonials, endorsements and performance claims should be reviewed for compliance with the SEC’s Marketing Rule and applicable recordkeeping requirements.

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