The U.S. Securities and Exchange Commission defines an investment advisor as a person or business that receives compensation for providing investment advice or issuing reports on individual securities.
Investment advisors provide recommendations and research on stocks, exchange-traded funds and other securities in exchange for a fee. While investment advisors may register with the SEC if they manage $25 million or more in assets, there are reporting requirements for larger advisors. When an advisor manages $100 million or more, they must register with the SEC and provide quarterly holdings disclosures to the regulator. These larger advisors are known as registered investment advisors.
Investment advisors typically monitor the performance of clients’ investments and provide professional guidance about what and when to buy and sell. Whether it’s an individual or firm, an investment advisor’s goal is to help manage your investments and make sure your portfolio aligns with your individual financial goals.
Some investment advisors have a broad area of expertise and help clients with all aspects of their financial life, including creating a comprehensive investment plan. Other investment advisors have a narrow focus, such as dividend stocks or corporate bonds.
To qualify as an investment advisor, a person must pass the Series 65 or equivalent exam. Investment advisors are held to the fiduciary standard of care set by the Investment Advisers Act of 1940, which requires them to act in their clients’ best interests rather than their own. Other certified financial professionals – such as brokers who work for broker-dealers – are held to the lower suitability standard set by the Financial Industry Regulatory Authority, which only requires that any recommendations be suitable for the client based on the client’s financial needs and objectives.
One popular type of investment advisor is the robo advisor. Robo advisors use computer algorithms to build, manage and optimize investment portfolios. Many robo advisors are registered with the SEC as investment advisors. Robo advisors often offer lower fees than human advisors, but they can’t understand complex client circumstances and help with specific guidance and recommendations outside of the parameters coded in their software.
Investment advisors can charge fees in several different ways. Some advisors charge a percentage of the value of your overall portfolio, such as 1% annually. This percentage may vary depending on the size of your portfolio. Other investment advisors charge an hourly fee based on the amount of time they spend managing your portfolio. These rates can vary widely but are often $120 to $300 per hour range. Some investment advisors charge a flat annual retainer, which often falls in the $6,000 to $11,000 per year range. Finally, some investment advisors use a model that involves a combination of two or more of the fee structures mentioned.
- Less time spent on money management. Hiring an investment advisor to manage your investments can save you a tremendous amount of time that you would otherwise spend monitoring your portfolio and researching the market.
- Better returns. Professional advisors are more skilled, experienced and qualified than the average person when it comes to understanding market conditions, optimizing a portfolio and adjusting to changes in the macroeconomic environment.
- Lower stress. An investment advisor can give you peace of mind that your retirement nest egg is in capable hands. It can be very stressful to regularly make potentially life-changing financial decisions on your own, and your attachment to your portfolio can make it difficult to keep emotions in check and remain rational.
- Cost. The biggest con to using an investment advisor is the fees they charge for their services, which eat into your overall returns.
- Risk. Just because an investment advisor is a professional doesn’t mean the advisor is particularly skilled at the job. You’re on the hook for the advisor’s fees even if your portfolio isn’t performing particularly well. Relying too heavily on an investment advisor may also prevent you from learning and understanding how to manage your investments, making you less financially independent.
- Investment style. Depending on your level of investing proficiency and engagement with your financial advisor, you may not fully understand or agree with everything your advisor puts in your portfolio.