What is an Investment Advisory?

Investing can feel overwhelming, especially when markets shift and financial goals evolve over time. That’s one reason many people turn to investment advisors for professional guidance and portfolio management. But working with an advisor also involves costs and trade-offs that investors should understand before making a decision. Knowing the potential advantages and drawbacks can help you determine whether partnering with an investment advisor makes sense for your financial strategy.

You can also consider consulting an individual financial advisor who can provide more customized support as you create or update your 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 and 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™ (CFP®) or a Chartered Financial Analyst (CFA), 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.

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How Do You Pay Investment Advisory Firms?

An investment advisory firm reviews a client portfolio.

Many investment advisory firms charge clients an asset-based fee, which is typically calculated as a percentage of assets under management (AUM). Under this model, the advisor manages an investment portfolio and charges an annual fee based on the total value of the assets they oversee. Fees often range from around 0.25% to 1% of assets per year, though the exact percentage can vary depending on the firm and the level of service provided.

Some investment advisory firms charge clients hourly rates or flat fees for specific financial planning services. For example, an advisor may charge a set fee to create a financial plan, review an investment portfolio or provide retirement planning guidance. This fee structure can appeal to clients who want advice without ongoing portfolio management.

In recent years, some advisory firms have introduced subscription-style pricing models. Under this approach, clients pay a monthly or annual fee in exchange for ongoing financial advice and planning support. Subscription pricing may be more common among advisors who work with younger clients or individuals who are still building wealth.

Although many registered investment advisors operate on a fee-only basis, some advisory firms or affiliated professionals may earn commissions when clients purchase certain financial products. These could include insurance policies, annuities or other investment products. When commissions are involved, it’s important for clients to understand how the advisor is compensated and whether potential conflicts of interest exist.

Pros and Cons of Working With an Investment Advisor

One potential benefit of working with an investment advisor is access to professional expertise and market knowledge. Advisors often help clients evaluate investment opportunities, build diversified portfolios and adjust strategies based on financial goals and market conditions. For investors who may not have the time or experience to manage investments on their own, this guidance can provide added confidence and structure.

Investment advisors can also provide tailored strategies designed to match an individual’s financial situation, risk tolerance and long-term objectives. Instead of relying on generic investment approaches, an advisor may help develop a plan that considers factors such as retirement goals, tax considerations and income needs. This personalized approach can make it easier to stay focused on long-term financial priorities.

Managing investments requires ongoing research, portfolio monitoring and periodic adjustments. An investment advisor can handle many of these responsibilities on behalf of clients, helping them stay on track without needing to manage every detail themselves. Regular reviews and adjustments may also help ensure that portfolios remain aligned with changing financial goals.

In some cases, advisors may receive commissions or incentives tied to certain financial products or transactions. When compensation is linked to specific investments, it can create potential conflicts of interest. Investors may want to ask about an advisor’s compensation structure and whether they follow a fiduciary standard to better understand how recommendations are made.

Bottom Line

An advisor at an investment advisory firm.

nvestment advisory firms provide professional guidance to help individuals manage their investments and pursue long-term financial goals. Working with an advisor can offer benefits such as personalized strategies, professional expertise and ongoing portfolio oversight. However, investors should also consider potential drawbacks, including advisory fees and possible conflicts of interest tied to compensation structures.

Financial Advisor Tips

Consider having friends and family recommend an advisor, or find someone with an online screening tool. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goal, 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.