Investment advisor
Encyclopedia : I : IN : INV : Investment advisor
An investment advisor (or investment adviser) is an individual or firm that advises clients on investment matters on a professional basis.
They tend to fall into two categories:
- investment advisors offering direct financial advice to individuals or businesses, or
- investment advisors offering asset management for (typically) corporate clients.
United States
In the United States investment advisors must be registered under the Investment Advisers Act of 1940 as amended, and must abide by the rules and regulations of the U.S. Securities and Exchange Commission or state law depending on the amount of money under management.Common examples of investment advisors include pension fund managers, mutual fund managers, trust fund managers and also individuals, partnerships, or corporations which have registered under the appropriate act. An investment advisor may or may not be granted discretionary authority by private clients to manage their personal investments. Stock brokers (known as "registered representatives" under U.S. federal law and licensed in the various states as "general securities salespersons") are not necessarily (and normally are not) registered investment advisors.
While a registered representative (stock broker) may charge fees rather than commissions, and may have discretionary authority to "trade" the account, he or she is not held to the high standard of being required to demonstrate that all advice, purchases, fees, and sales were appropriate, fair, and clearly in the best interest of the client/investor.
Although most registered investment advisors are also licensed as stock brokers in order to execute the securities purchases and sales authorized by the investor, the vast majority of stock brokers are, as their state license implies, salespersons, and are authorized to provide financial advice (and recommend sales and purchases) only as an incidental to their primary brokerage service.
Although the lines between investment advisors and stock brokers often blur, the distinction is important. In general, under U.S. law, investment advisors owe their clients an ongoing fiduciary duty to provide full and complete disclosure of all fees, conflicts of interest, and if so authorized, to exercise discretion in selecting investments with only their clients' best interests in mind. Stock brokers on the other hand, typically do not owe a fiduciary duty to clients beyond the proper execution of buy and sell orders.
In most cases, a registered investment advisor (RIA) is actually a corporation or partnership while the person actually providing the advice is usually an investment advisor representative (IAR) of the advisor organization. Many, if not most, investment advisor representatives and individuals who are registered as investment advisors have passed the appropriate examinations, agreed to abide by the Code of Ethics and Professional Responsibility, as well as maintain the required continuing education credits to be licensed as either a Certified Financial Planner (CFP®) practitioner by the Certified Financial Planner Board of Standards, Inc. [link] or a Chartered Financial Analyst(CFA®)holding a charter from the CFA Institute [link].
CFA is a registered trademark of the CFA Institute. CFP is a registered trademark of the Certified Financial Planner Board of Standards, Inc.
United Kingdom
In the United Kingdom investment advice is given either by a financial advisor or a stock broker.Financial advisors need to pass an exam to practice (Financial Planning Certificate) and are authorised by the Financial Services Authority a UK government qango that needs to be satisfied the advisor is a “fit and proper person” before they can practice.
Financial advisors are either tied, multi-tied, or independent.
As the classifications suggest a tied advisor can only recommend financial products marketed by the company he or she represents. Typically that company employs him or her but in some cases he or she can work for that organisation under a type of self employed contract that usually precludes other paid work of any kind.
A multi-tied agent performs a similar role except that he or she represents a number of different companies. This is sometimes referred to as the panel system.
An Independent Financial Adviser must offer whole of market advice and, in addition, must offer prospective clients the choice of paying a fee for advice, rather than being remunerated via commission from the financial product provider.
Tied and multi-tied advisors are nearly always rewarded via commission although in some cases (and if the advisor is employed rather than self employed) commission may be expressed in notional terms to justify a salary.
In the UK there has been much debate in the media about the effectiveness of financial advisors, especially in situations where there is perceived bias toward certain products which offer high commission.
There can be issues of client accountability and the concept of "best advice" as the advisor — either tied or independent — has a moral duty to achieve this for clients. Best advice is difficult to achieve if the advisor is not independent; therefore a type of compromise exists where a tied or multi-tied advisor must recommend the most appropriate financial product available to him or her to suit their clients needs even if a more appropriate product is available in the market place.
In the UK many believe that impartial advice can be obtained only by consulting an independent financial advisor.
See also
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