Investment Adviser

An investment adviser is a person or firm that, for pay, advises others about investing in securities or manages investment portfolios on their behalf. Advisers range from one-person financial planning practices to global asset managers that run mutual funds, ETFs, hedge funds and accounts for pension funds and endowments. US law spells it "adviser"; "advisor" is common in marketing. Software built for this market, from automated robo-advice to the portfolio tools human advisers use to manage client accounts, is grouped under the label WealthTech.

In the United States, advisers are governed by the Investment Advisers Act of 1940 and regulated by the Securities and Exchange Commission (SEC) or by state securities regulators. A firm that registers is commonly called a registered investment adviser (RIA). Advisers differ from broker-dealers, which are paid mainly to execute transactions and are regulated by the SEC and FINRA, a self-regulatory organization. In the UK and EU, investment advice and portfolio management are regulated activities under MiFID II and the rules of bodies such as the Financial Conduct Authority (FCA).

An investment adviser is to money what a family doctor is to health. The doctor is paid for judgement, not for selling a particular medicine, and is expected to recommend what is best for the patient even if it earns the doctor less. If the doctor has a reason to prefer one treatment, such as a payment from a drug company, the patient has a right to know.

Some advisers only give recommendations and leave the decision to the client. Others are given authority to buy and sell on the client's behalf, much as a patient might let a surgeon decide during an operation. In both cases the adviser is held to a duty of trust.

Section 202(a)(11) of the Advisers Act defines an investment adviser as anyone who, for compensation, is in the business of advising others about the value of securities or the advisability of buying or selling them, or who issues analyses or reports on securities as part of a regular business. The Act excludes banks, lawyers, accountants, engineers and teachers whose advice is solely incidental to their profession, broker-dealers whose advice is solely incidental and who receive no special compensation for it, and publishers of general, regularly circulated publications.

Since the Dodd-Frank Act of 2010, advisers with roughly $100 million or more in regulatory assets under management, and all advisers to registered funds, generally register with the SEC; smaller advisers register with their state. Registration is made on Form ADV: Part 1 gives regulators data on the firm's business, ownership and disciplinary history, and Part 2A, the "brochure", explains to clients in plain language the firm's services, fees, conflicts and methods. Since 30 June 2020, advisers serving retail investors must also deliver Form CRS, a short relationship summary. Anyone can look up a firm or individual adviser on the SEC's Investment Adviser Public Disclosure website.

An adviser is a fiduciary. The US Supreme Court confirmed in SEC v. Capital Gains Research Bureau (1963) that the anti-fraud provision in Section 206 of the Advisers Act imposes a fiduciary duty, and in June 2019 the SEC published an interpretation setting out its two parts:

• Duty of care. Advice must be in the client's best interest, based on a reasonable understanding of the client's goals, risk tolerance and time horizon; the adviser must seek best execution of trades and monitor the account as often as the relationship requires.
• Duty of loyalty. The adviser may not put its own interests ahead of the client's and must fully and fairly disclose all material conflicts, eliminating or obtaining informed consent to those it keeps.

Other SEC rules require advisers to keep a compliance programme with a chief compliance officer (Rule 206(4)-7), to hold client assets with a qualified custodian such as a custodian bank (Rule 206(4)-2), to adopt proxy voting policies (Rule 206(4)-6) and to follow the Marketing Rule (Rule 206(4)-1, compliance from November 2022). Broker-dealers recommending investments to retail customers follow a separate "best interest" standard, Regulation Best Interest, in force since June 2020.

• Fund managers. Firms that act as the adviser to a registered fund under a contract approved by the fund's board of trustees, paid through a management fee disclosed in the prospectus.
• Wealth managers and financial planners. Firms advising individuals and families on asset allocation, retirement accounts such as an IRA, and tax.
• Institutional managers and consultants. Firms running mandates for pension plans, insurers and family offices, or helping them choose managers.
• Private fund advisers. Managers of hedge funds, private equity and venture funds.
• Robo-advisers. Firms that provide portfolio advice mainly through software; they are registered advisers with the same fiduciary duty.

Fees may be a percentage of assets under management (commonly around 1% a year for individual clients, often less for large accounts), a flat or hourly fee, or a performance fee, which US rules allow only for "qualified clients". The individuals who give advice are usually a firm's investment adviser representatives or portfolio managers.

In the UK, the Retail Distribution Review, in force since 31 December 2012, banned advisers from receiving product commissions on retail investment advice and required clients to agree an adviser charge. MiFID II, applied across the EU from January 2018, requires firms to say whether advice is "independent" and, if so, bans them from keeping third-party inducements. Many other jurisdictions, such as India through SEBI's Investment Advisers Regulations, separate fee-based advice from product distribution in similar ways.

Asset-based fees reward advisers for gathering assets rather than for results, and can be costly over decades. Disclosure-based conflict management relies on clients reading documents that many skip. The line between an adviser and a broker is confusing to many investors, and some firms are dually registered as both. SEC enforcement cases regularly involve undisclosed fees and misleading performance claims.

• Investor.gov (SEC): Investment Adviser
• SEC: Investment Adviser Public Disclosure