Investment adviser

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Investment Advisers (IA) are people or firms who are paid to give advice on investing in securities such as stocks, bonds, mutual funds, or exchange-traded funds (ETFs). Depending on their classification, Investment Adviser are regulated. For example, an Investment Adviser who registers with the Securities and Exchange Commission (SEC) must follow a fiduciary standard to act in their client's best interest. An adviser registered with the SEC is known as a Registered Investment Adviser (RIA).

Investment advisers
Although many of the people who work at advisory firms fall under the definition of "investment adviser," the SEC generally does not require them to register individually as advisers with the SEC. Instead, the advisory firm itself must register with the SEC. The firm's registration covers its employees and other people under its control, provided they are working on the firm's behalf. As a result, only firms can be Registered Investment Advisers (RIA), while its employees can only be Investment Adviser Representatives (IAR).

Registered Investment Advisers may not use the term “registered investment adviser” unless they are registered, nor should can they use it to suggest a level of professional competence, education or special training. The term "RIA" should not appear after a person’s name, because using initials after a name usually indicates a degree or a licensed professional position requiring qualifications, and there are no federal qualifications for becoming an SEC-registered adviser. For example, someone could not use "RIA" on their business card.

Investment advisers who manage less than $100 million in assets must register with the state securities agency in the state where they have their principal place of business.

Anyone registered with the FINRA typically makes commissions and fees from the products they sell (brokerage or mutual fund company). They must provide their clients with products that are "suitable" (the suitability standard), but not necessarily the cheapest or the best.

Regulations
Section 202(a)(11)(C) of the Investment Advisers Act of 1940 exempts from the definition of an Investment Adviser (and therefore the associated fiduciary standard)"... any broker or dealer whose performance of such services is solely incidental to the conduct of his business as a broker or dealer and who receives no special compensation therefor."

In Release 34-51523, the Financial Industry Regulatory Authority (FINRA) (the US Securities Self Regulatory Organization (SRO) with authority over Brokers and Dealers) determined that Broker-Dealers are "not to be deemed investment advisers" and therefore are not required to follow the same fiduciary standards as Investment Advisers when recommending investments to clients (as are Registered Investment Advisers (RIA)).

Registered Representatives (RRs) affiliated with a Broker-dealer must therefore recommend securities that are deemed "suitable" for non-institutional clients.

Suitability
Suitability means that a broker can sell any fund or any investment as long as it fits the purpose. For example, if stocks are suitable for an investor, then it does not matter if a broker advises an 8% load stock fund that has 3% in annual fees because it is agreed that stocks in general are a suitable, and so any diversified stock mutual fund will do.

Suitability is entirely different from fiduciary standard. Under a fiduciary standard, an investment adviser must not only recommend suitable investments, but they must also recommend funds that are in the best interest of their client. Clearly, a fund with an 8% load and 3% in fees is not in the best interest of anyone. Low-cost index funds are in the best interest of clients.

This is the difference between a broker's investment recommendations under a suitability standard, and an investment adviser's recommendations under a fiduciary standard.

Fiduciary standard
On April 8, 2016, the Department of Labor issued revised regulations which widens the definition of a fiduciary for advisers who have control over retirement plans. This aims to avoid a conflict of interest between an adviser (including a broker-dealer) and the client. Firms must have complied with these new rules by July 1, 2019. Before July 1, 2019, advisers could intend to comply with these rules.

Background checks
If you are considering hiring an investment adviser (financial adviser, broker, or investment firm) it is important that you check their background credentials and any complaints on file. The SEC and FINRA offer free tools to help you do this.

It is a good idea for you to use both tools. If you cannot find a financial adviser in the SEC's Investment Adviser Public Disclosure (IARD) database, but you do find them in FINRA's Broker Check, you can consider this adviser to be a product salesperson.

SEC Investment Adviser Public Disclosure
The SEC's Investment Adviser Public Disclosure (IAPD) database provides information about current and former Investment Adviser Representatives (IARs) and Investment Adviser firms registered with the SEC and/or state securities regulators. Choose either Individual or Firm to start. Be sure browser cookies are enabled. The results will contain links to "Investment Adviser Firm" or "Brokerage Firm" as applicable.
 * Investment Adviser Search, from the SEC

Brokerage firm
The Brokerage Firm link will launch into the FINRA's BrokerCheck (below) which provides additional information such as a state-by-state breakdown where a broker is licensed to practice, or if any complaints have been filed.

Investment adviser firm
The "Investment Adviser Firm" link goes to Form ADV (Uniform Application for Investment Adviser Registration), each section appearing in a menu on the left-hand side. Among other items, you can use Form ADV to see if a firm offers financial planning, as opposed to providing investment advice.

Go to "Item 5 Information About Your Advisory Business" in the ADV form and look for:


 * 5F(1): Do you provide continuous and regular supervisory or management services to securities portfolios?

If the answer to 5F(1) is No, this firm is not in the investment advisory business. It might give investment advice and sell investment products, but that does not make it an investment adviser that you want to manage your money.

Critically important is "Item 11 Disclosure Information." Every "No" box on this page should be checked, because a "Yes" indicates that the firm has violated some of the laws and regulations governing registered investment advisers.

Where a "Yes" is present, the firm must detail on form ADV the date and nature of the infraction, and how it was settled. A minor infraction, perhaps from some administrative error involving small amounts of money, may be forgiven, but you want to closely scrutinize any "Yes" on this page.

FINRA BrokerCheck
The Financial Industry Regulatory Authority, known as FINRA, is the largest non-governmental regulator for all securities firms doing business with the United States public—more than 5,000 firms employing more than 660,000 registered representatives. FINRA was created in 2007, consolidating NASD and NYSE Member Regulation.

FINRA BrokerCheck is a free tool to help investors check the professional background of current and former FINRA-registered securities firms and brokers. It should be the first resource you turn to when choosing whether to do business with a particular broker or brokerage firm. Note that financial advisers can also be registered brokers. Enable browser cookies. At the report summary, select "View Full PDF Report" (upper right corner) to get the full details. If applicable, the FINRA report will show any complaints filed against the adviser.
 * BrokerCheck

Investment advisory fees
Some advisers may not charge for managing money market funds. If the exclude money market funds in the total portfolio value, you may be paying a different fee than you expect.

Please check your adviser's service agreement for this exclusion.

Tax deductions
Before 2018, you could deduct fees paid to investment advisers for portfolio management ("investment counsel and advice") on your taxes, if the fees exceeded 2% of your adjusted gross income (AGI).

After 2018, you can no longer deduct advisory fees.

Selecting an investment adviser

 * Investor Bulletin: How to Select an Investment Professional, from the SEC.
 * The 19 Questions to Ask Your Investment Adviser, by Jason Zweig, jasonzweig.com, August 25, 2017
 * The Special Trick to Find the Right Financial Adviser, by Jason Zweig, jasonzweig.com, September 8, 2017