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What Is an Investment Advisory?


When you need financial advice, an investment advisory is one pace you can turn. Generally speaking, an investment advisory is a firm that helps its clients with developing an investment plan to grow wealth strategically.

Here’s how investment advisory firms operate and what you can expect when working with one.

Also, consider working with an individual financial advisor as you create or update a financial plan.

Investment Advisory Explained

An investment advisor is an individual or a firm that specializes in advising clients on the buying and selling of securities, in exchange for a fee. There are two ways this can happen. First, an investment advisory can offer their services by working directly with their clients to offer investment advice. Alternately, firms or individuals can issue advisory reports and other publications on specific securities.

The Investment Advisers Act of 1940 defines an investment advisor’s responsibilities and duties. The act spells out three guidelines for defining who or what is (and isn’t) an investment advisor:

  • What kind of advice are they offering?
  • How do you pay and individual or firm for their advisory services?
  • Where does a majority of their income come from (i.e. providing investment advice or someone else)?

Any individual or firm that provides advice or makes recommendations on securities falls under the advisor classification. That includes money managers, investment consultants, financial planners, wealth managers, asset managers, hedge fund general partners any other individual who receives compensation for offering advice on securities investing.

Investment advisors are generally required to register with the U.S. Securities and Exchange Commission (SEC). Generally, only firms or individuals with at least $25 million in assets under management are allowed to register with the SEC. Registration is required for advisors managing $100 million or more in assets. Advisors who don’t meet the $25 million threshold are required to register with state regulatory agencies.

What Is a Registered Investment Advisor?

A registered investment advisor or RIA can be an individual or an advisory firm that meets certain education, ethical and experience guidelines. To become an RIA, you must pass a comprehensive exam administered by the Financial Industry Regulatory Authority (FINRA). This can be the Series 65 exam, the Series 66 exam or the Series 7 exam. All three measure an investment advisor’s knowledge of the ethical, legal and professional standards required to become an RIA.

There are no special licenses or professional designations required to become a Registered Investment Advisor However, it can help to have them. Someone who’s already a Certified Financial Planner or a Chartered Financial Analyst, for example, may be able to waive the examination requirement in obtaining an RIA designation.

One important step in the registration process is completing Form ADV. This is where an RIA discloses their fee schedule, investment strategy, potential conflicts of interest, and prior criminal, civil actions, or disciplinary actions related to their services . The SEC’s Investment Advisor Public Disclosure tool lets you search for advisory disclosures online.

Most importantly, an RIA helps their clients manage their portfolio. For example, they might recommend buying or selling stocks or mutual funds to diversify holding. An RIA could also help build a plan for your retirement income.

How Do You Pay Investment Advisory Firms?

investment advisoryRIAs are fiduciaries. As a result, they have an ethical obligation to act in the best interests of their clients at all times. This fiduciary standard directly impacts how advisory firms structure their fees.

Rather than taking commissions for recommending specific securities, an RIA can structure their fees in these ways:

  • Charging a flat investment management fee.
  • Tiering fees, based on services provided.
  • Basing fees on a percentage of client assets under management.
  • Charging an hourly fee.
  • Combining flat fees with an annual management or retainer fee.

According to a 2019 industry study, Registered Investment Advisors charged an average 1.17% in feest, a slight decrease from 1.22% the previous year. That roughly matches the average financial advisor cost, which typically ranges from 1% to 2% of managed assets.

Pros and Cons of Working With an Investment Advisor

The fiduciary standard is the key reason for working with an RIA. They must manage your portfolio in a way that benefits you, not their commission. That may reassure you that an advisor’s financial suggestions fit your plan.

However, an investment advisor focuses on securities may not provide comprehensive financial advice. You might need help with estate planning or college savings planning, for instance. As a result, you may require a Certified Financial Planner or another type of financial advisor. Using multiple advisors means paying multiple fees, which may not be ideal if you’re trying to minimize costs for financial advice.

The Bottom Line

investment advisoryAn investment advisor can offer specialized knowledge and skills when it comes to managing your investments. They can guide you in choosing securities to fit with your short- and long-term investment goals. Whether you choose to work with an investment advisor over another type of financial professional ultimately depends on your needs, whether you’d prefer to work with a fiduciary and how much you’re comfortable paying to receive professional investment help.

Financial Advisor Tips

  • Consider having friends and family ecommend an advisor, or find someone with an online screening tool. Finding the right financial advisor that fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • When vetting any type of financial advisor, be sure to ask the right questions. Hone in on the fees an advisor charges, what type of services they provide, which professional designations they may hold, how many years of experience they have and what type of clients they typically work with. It’s also helpful to use tools like FINRA’s Broker Check to take a closer look at an advisor’s professional background.
  • Pay particular attention to fees so you know exactly what an advisor charges in exchange for services. Paying a fee that’s equivalent to a percentage of assets under management could be more expensive than paying a flat fee, for instance, if you’re a higher net worth investor. On the other hand, if you’re just starting, then a percentage basis may be more affordable.

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