Just What Is An Investment Adviser?

Before hiring an investment adviser, it’s important to understand what kind of services they provide, how much it costs and what their responsibility is to you, the client. Read on for a breakdown of some of the key characteristics.

What Kind of Services Can an Investment Adviser Offer?

An investment adviser, or asset manager, takes a deep dive into your finances to determine what type of investments can best help you reach your objectives including, but not limited to your:

  • Financial goals
  • Personal situation
  • Income and debt
  • Tax status
  • Risk Tolerance

There are two main types of services an investment adviser offers. They can either create a one-time financial plan for which you’ll pay a flat fee, or they’ll manage your investments on an ongoing basis for an ongoing service fee.

One-Time Financial Plan

If you opt for a financial plan instead of ongoing asset management, your investment adviser will create a plan based on the above information, your investment time horizon and other factors. It’s up to you then to decide whether or not to have the investment adviser place those transactions for you, employ another financial professional to put the plan in motion or place the transactions yourself.

Ongoing Asset Management

In this scenario, once your objectives and financial situation are clear, your investment adviser will open an advisory account in your name with an affiliated broker-dealer and start making investments. You’ll get active management of your portfolio throughout the year based on changes to the market, life changes and other factors.

Unlike a financial planner, who generally provides a more holistic approach to planning including retirement planning, debt management, college planning, insurance and how you spend your money in general, investment advisers are more likely to focus primarily on growing your investment assets. This line can get pretty blurry, however, and there are plenty of advisers who offer the services of an investment adviser, financial planner or broker dependent on your needs.

What Does Discretionary Authority Mean?

When you give an investment adviser discretionary authority, it means they can make transactions on your behalf without getting your approval before the transaction. It’s generally considered a matter of convenience and timeliness since the investment adviser doesn’t make more money by simply making more trades — as a broker would. You will, of course, discuss the overall strategy for your plan before your advisor starts making investments, and you can put limits on the types of transactions your advisor can perform if you choose to.

How Does an Investment Adviser Make Money?

Unlike a broker who gets paid a commission on every buy or sell transaction they make on your behalf, an investment adviser will either get paid a flat fee if they’re providing a one-time financial plan or an annual management fee based on a percentage of the value of the assets they manage for you. It’s common practice for the fee to be paid every quarter and you’ll have to pay it regardless of the types of transactions, products and volume your investment adviser places during each quarter.

How Much Will It Cost to Hire an Investment Adviser?

For a one-time financial plan, your fixed fee will depend on the complexity of your planning needs, but the investment adviser should be able to quote a price before you agree to hire them. For ongoing asset management, fees differ from adviser to adviser.

In addition to the payment you make to your adviser, you’ll also pay other fees and costs in connection with the investments selected for your portfolio, such as sale loads and annual operating fees, and for the servicing of your advisory account, such as account termination fees and wire transfer fees. Your investment adviser won’t receive a share of these fees, but it’s important to be aware of all the potential costs associated with your account.

What Type of Credentials Are Required to Become an Investment Adviser?

Anyone wishing to become an investment adviser will be required to pass the Series 65 or Series 66 exam before offering advice. Investment advisers are regulated by the SEC or state authority on an ongoing basis depending on how many assets they manage.

What Are the Legal Obligations of an Investment Adviser?

Investment advisers are required to act as a fiduciary when providing services, which means they are legally required to act in the best interest of their clients at all times — putting the needs of their clients before themselves. The investments selected by investment advisers must be suitable based on your objectives and financial situation, and advisers are required to seek the best transaction results available for each client.

Your investment adviser will also actively monitor your investments by comparing them with relevant benchmarks and analyzing economic and market conditions. If changes in the market impact your investments or your personal situation changes, your investment adviser will assess their prior recommendations and make changes to your portfolio to better align with your objectives.

Are There Conflicts of Interest You Should Know About?

Although investment advisers are always required to put your needs first, it’s virtually impossible to provide advice without some possibility of a conflict of interest arising. While it doesn’t mean that an adviser will take advantage of you, it’s important to be aware of potential scenarios.

For example, the cost of training and educational events for investment advisers is often paid for, in part, by sponsors of certain investment products, which could give advisers an incentive to recommend these products, and since your adviser is paid by the dollar amount of the assets they manage, there could be an incentive to recommend riskier investments that might result in higher returns for you – and higher fees paid to your adviser.

How Can You Determine if an Adviser Has Your Best Interests at Heart?

As part of the hiring process, it’s always good to interview your investment adviser to make sure their investment philosophy and services work with your objectives. Some signs of a good adviser include:

  • Taking the time to fully understand your objectives.
  • Being responsive to your needs when you have questions.
  • Holding regularly scheduled meetings to discuss your finances.
  • Educating you on the different types of products and how they impact your portfolio.
  • Never pressuring you to invest in something you feel is too risky.
  • Being transparent about their fees and how much time they spend managing your portfolio.