Smart Investor

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.