Investment Advisors Vs Managers: What's The Real Difference?

Investment advisors and investment managers are often confused with each other, but they are not the same thing. While both roles involve handling money matters, there are some key differences between the two. This article will introduce the topic and explore the distinct roles and responsibilities of investment advisors and investment managers, providing clarity on the matter.

Investment advisors are held to a fiduciary standard, while brokers operate under more relaxed rules

Investment advisors and investment managers are not the same thing. Investment advisors are professionals who offer guidance on a wide range of financial topics, including investment management, retirement planning, estate management, tax management, budgeting, and debt management. On the other hand, investment managers, also known as portfolio managers, primarily focus on helping clients invest and manage their investment portfolios. While there are distinct differences between the roles, both investment advisors and investment managers share the common function of money management.

Now, regarding fiduciary standards, it's important to note that investment advisors are held to a fiduciary standard, which means they have a legal and ethical duty to act in their clients' best interests. This standard is established by the Investment Advisers Act of 1940 and enforced by the Securities and Exchange Commission (SEC) or state securities regulators. As fiduciaries, investment advisors must place their clients' interests above their own and avoid conflicts of interest. They are also required to provide investment advice based on accurate and complete information, ensure best execution of trades, and disclose any potential conflicts.

In contrast, brokers, who work for broker-dealers, operate under more relaxed rules. They are governed by the suitability standard set by the Financial Industry Regulatory Authority (FINRA). This standard requires brokers to believe that their recommendations are suitable for clients' needs, but it does not require them to put their clients' interests first. Brokers serve the broker-dealers they work for, and their primary goal is to make transactions that benefit their employers. This can sometimes lead to conflicts with clients, who may feel that brokers are prioritizing selling their own instruments or adding unnecessary transaction charges.

While brokers are not held to the same fiduciary standard as investment advisors, it's worth noting that regulations and standards have evolved over time. For example, in 2019, the SEC adopted Regulation Best Interest (BI), which requires broker-dealers to act in the best interest of their customers when making recommendations. This regulation raises the standard of conduct for brokers and brings it closer to the fiduciary standard followed by investment advisors.

Investment advisors are paid for their advice, reports and analyses

Investment advisors are paid for their advice, reports, and analyses. They are typically brokers who buy and sell securities for themselves or their clients. They are held to the fiduciary standard, meaning they must act and advise in their clients' best interests.

The Securities and Exchange Commission (SEC) has a three-pronged definition of an investment advisor:

• For compensation
• Engaged in the business of
• Providing advice or issuing reports on individual securities

This means that an investment advisor is paid for their advice or reports and regularly provides these services. Their advice is not limited to advising about individual securities; they can also offer guidance on asset allocation and market trends.

Investment advisors work with their clients to understand their financial worth, goals, risk tolerance, and life stage. They use this information to create a detailed investment plan tailored to their clients' needs. Depending on the agreement with the client, an investment advisor will periodically review and rebalance the client's portfolio to ensure it remains aligned with their financial goals.

Investment advisors can charge a flat fee for their services, whether time-based or asset-based. In the US, their fee structure may also be commission-based. However, this model has a higher risk of bias as advisors may favour certain financial products to increase their earnings.

In summary, investment advisors are compensated for their advice, reports, and analyses. They provide valuable financial guidance and help clients make informed investment decisions by assessing their financial situation and offering tailored investment strategies. Their fees can vary depending on the agreement and location, but their primary goal is to act in their clients' best interests and help them achieve their financial objectives.

Investment advisors can manage investment portfolios, offer financial planning services and provide licensed brokerage services

Investment advisors and investment managers are not the same thing. Investment advisors are financial professionals who provide investment recommendations or conduct security analysis in exchange for a fee. They often have discretionary authority over their clients' assets and are required to uphold standards of fiduciary responsibility. On the other hand, investment managers are individuals or organisations who handle activities related to financial planning, investing, and managing a portfolio for their clients.

Investment advisors can offer a range of services, including managing investment portfolios, offering financial planning services, and providing licensed brokerage services. Here are some details on each of these services:

Managing Investment Portfolios

Investment advisors can help clients manage their investment portfolios by providing advice and making investment recommendations based on the client's financial goals, risk tolerance, and investment horizon. They can assist in selecting, creating, and monitoring a portfolio of stocks, bonds, mutual funds, and other investments to ensure the client's financial goals are met. Investment advisors also have the discretion to act on behalf of their clients without obtaining prior formal permission, provided that the client has granted this authority.

Offering Financial Planning Services

In addition to investment advice, investment advisors can offer holistic financial planning services. This includes helping clients with budgeting, debt management, tax management, retirement planning, estate planning, and more. They assess the client's overall financial standing, goals, and risk tolerance to offer comprehensive financial guidance. For example, investment advisors can help clients create an emergency fund, set short-term and long-term financial goals, and maximise retirement account benefits.

Providing Licensed Brokerage Services

Investment advisors, also known as stockbrokers, are licensed professionals who are registered with the Securities and Exchange Commission (SEC) or the relevant state regulator. This registration is mandatory for investment advisors who provide investment advice or manage client assets. The precise definition of an investment advisor was established through the Investment Advisers Act of 1940. By law, investment advisors must put their clients' interests first at all times and avoid any real or perceived conflicts of interest.

Investment advisors are legally defined and registered with the Securities and Exchange Commission (SEC)

Investment advisors are legally defined by the Securities and Exchange Commission (SEC) as any person or firm that:

• Provides financial or investment advice, makes recommendations, issues reports, or furnishes analyses on securities, either directly or through publications, for compensation.
• Holds themselves out as an investment advisor or as providing investment advice.
• Typically provides advice about specific securities or categories of securities.

The SEC requires that any person or firm meeting the definition of "investment advisor" under the Investment Advisers Act must register with the Commission, unless exempt or prohibited from doing so. The registration process involves submitting Form ADV, which includes information about the advisor's business practices, conflicts of interest, and background.

There are, however, some exceptions and exemptions to the registration requirement. For example, certain professionals, such as lawyers, accountants, and brokers, are excluded from the definition of "investment advisor" if their performance of advisory services is solely incidental to their primary profession. Additionally, there are specific exemptions for advisers with fewer than 15 clients, advisers to insurance companies, and advisers to charitable organizations, among others.

The SEC also categorizes investment advisors based on their regulatory assets under management (RAUM), with small advisors having less than $25 million, mid-sized advisors between $25 million and $100 million, and large advisors having more than $100 million of RAUM. Generally, small and mid-sized advisors are registered with state securities authorities, while large advisors are registered with the SEC. However, there are exceptions to this general rule, and some mid-sized and multi-state advisors may register with the SEC.

Registered investment advisors are subject to various regulations and requirements, including disclosure obligations, suitability requirements, custody requirements, and restrictions on advertising and referral fees. They are also required to maintain and preserve specified books and records, and make them available for inspection by the SEC.

Investment advisors must pass the Series 65, Uniform Investment Adviser Law Examination, or equivalent exam

Investment advisors and investment managers are not the same thing. Investment advisors are professionals who offer guidance on a wide range of financial topics, including investment management, retirement planning, estate management, tax management, budgeting, and debt management. On the other hand, investment managers, often referred to as portfolio managers, primarily focus on helping clients invest and manage their investment portfolios.

Now, for an individual to become an investment advisor in the US, they must pass the Series 65 exam, also known as the Uniform Investment Adviser Law Examination. This exam is designed by the North American Securities Administrators Association (NASAA) and is administered by the Financial Industry Regulatory Authority (FINRA). The Series 65 exam is a comprehensive test that covers various topics essential for providing investment advice to clients.

The exam consists of 140 questions in total, with 130 scored questions and 10 unscored pretest questions. The pretest questions are used to evaluate their potential inclusion in future exams and do not count toward the final grade. To pass the exam, candidates must correctly answer at least 92 out of the 130 scored questions, equivalent to a score of 70%. Candidates have 180 minutes to complete the exam.

The Series 65 exam is structured into four main sections, each covering different topics relevant to the role of an investment advisor:

• Economic Factors and Business Information (15%, 20 questions): This section includes topics such as monetary and fiscal policy, economic indicators, financial reporting, quantitative methods, and basic risk concepts.
• Investment Vehicle Characteristics (25%, 32 questions): Candidates are tested on their knowledge of various investment options, including cash and cash equivalents, fixed-income securities, equities, pooled investments, and derivative securities.
• Client Investment Recommendations and Strategies (30%, 39 questions): This section focuses on understanding client profiles, capital market theory, portfolio management styles, tax considerations, retirement planning, and different types of accounts.
• Laws, Regulations, and Guidelines, Including Prohibition on Unethical Business Practices (30%, 39 questions): Candidates are evaluated on their knowledge of state and federal securities laws, rules, and regulations governing investment advisors and their ethical practices and fiduciary obligations.

Passing the Series 65 exam is a crucial step for individuals seeking to become investment advisors in the US. It ensures that they have the necessary knowledge and understanding of financial concepts to provide competent and ethical investment advice to their clients.

Frequently asked questions