What to Know About Investment Advisors

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Contributor, Benzinga
January 22, 2020

Do you need some help managing your money? Are you approaching retirement and need some advice? Whether you’re a seasoned investing pro or need advice on your current assets, speaking with an investment advisor can help you achieve your financial goals. We’ll take a look at what advisors do and how you can select the right advisor. 

Definition of an Investment Advisor 

An investment adviser is an individual or company paid to provide advice about securities to you. In other words, your financial advisor is an investing professional who can help you decide which stocks, bonds, funds and other assets you can add to your investment portfolio.

Your investment advisor might not only offer advice. Many investment advisors also offer portfolio management and financial planning services as well. Your investment advisor might even offer to buy and sell securities on your behalf if he or she is licensed as a broker. The specific services each investment advisor offers will vary depending on the company he or she works for. Certifications also matter, too.

Investment advisors have a fiduciary duty to their clients. This means advisors have an obligation to put your financial interests above their own. Most investment advisors accomplish this by instituting a noncompetitive fee structure paid by the client.

For example, you might pay your investment advisor a set percentage of the total assets you have under their management. As your investments grow, so does the amount of money that your advisor earns. This structure links your success to the success of your investment advisor, incentivizing them to work as hard as possible to help you succeed. 

What are RIAs?

A registered investment advisor (RIA) is a legal term that refers to an investment advisor or investment firm that’s registered with the Securities and Exchange Commission (SEC). RIAs are typically corporations or partnerships. Smaller RIAs may be registered with their local or state government until they reach a certain size, after which they must register with the SEC. As a general rule, the SEC regulates RIAs with at least $100 million of client assets under their control. An investment advisor may have less than $100 million of client assets and must register with his or her state control board. They may also choose to register with the SEC.

A company must be headed by individual investment advisors who have passed FINRA’s minimum investment advising exams to be an RIA. This typically includes the Series 7 exam and either the Series 65 or Series 66 exams, tests intended to prove that the advisor has enough of an understanding of investment and investing strategy to advise clients.

RIAs also have a fiduciary duty to their clients. This means they must take steps to avoid conflicts of interest and ensure that their company doesn’t receive compensation for pushing clients toward a particular fund, stock or other financial product. If an RIA fails to uphold this standard, it could lose its designation. 

Investment Advisor vs. Financial Advisor vs. Financial Planner

The terms “financial advisor,” “investment advisor” and “financial planner” are often used interchangeably. But there are a few very important distinctions between each.

  • Investment advisor: The term “investment advisor” is a legal classification. The only people that can call themselves an investment advisor are those who have registered with the SEC or their local government control board and passed the necessary exams. Investment advisors manage their clients’ assets directly or make recommendations for which assets to buy and sell.
  • Financial advisor: The term “financial advisor” is a catch-all term that refers to anyone who offers you financial services in exchange for a fee. The term “financial advisor” may refer to anyone from a stockbroker to an RIA to a representative who sells insurance products. There’s no such thing as a “registered financial advisor,” and nearly anyone may call himself a financial advisor.
  • Financial planner: A certified financial planner is a financial expert who has undergone rigorous training and passed a certification exam so he or she is qualified to handle multiple financial areas. A financial planner may analyze your current income and assets, make recommendations on how to maximize your retirement plan, assist with estate planning and more. Anyone can refer to himself as a financial planner, but only those who have passed the required courses may call themselves certified financial planners.

What’s the difference between a certified financial planner and an investment advisor? As a general rule, investment advisors focus solely on building and managing an investment portfolio. A certified financial planner may offer everything from insurance services to estate planning to wealth management. 

How Much Do Investment Advisors Cost? 

Investment advisors usually charge you a percentage of the total dollar amount of assets under management. For example, if you have a $500,000 stock portfolio and your investment planner charges a 1% annual fee, you’d pay $5,000 per year for service.

Each individual investment advising service sets its own fee schedule. The average RIA charges 1% to 2% of your total assets under management for service. If you have more assets under management, you’ll typically pay a lower percentage. Most investment advisors also charge a flat-rate fee in addition to the percentage you pay based on your portfolio size. This fixed-rate fee usually ranges between $2,000 and $7,500 annually.

Keep in mind that many investment advisors have a minimum portfolio value for clients. For example, an investment advisor might require you to have at least $1 million assets under management before he or she will accept you as a client. Some investment advisors have minimums as high as $2 million and others have no minimums at all. 

How to Find an Investment Advisor 

The key to finding the right investment advisor for you is to research RIAs in your area whose investment strategy aligns with your needs. Your investment needs will vary depending on a wide range of factors, including your age, current retirement savings, income, family needs and more.  

You can begin by searching our selection of the top financial planners in some of the largest cities in America. From New York City to Austin, we’ve collected information on the most reputable advisors in the United States. Choose the urban center closest to you and look for financial planners who also function as investment advisors. Browse through each advisor’s investment strategy and schedule a consultation when you find a strategy that appeals to you.

During your consultation, there are a number of questions you’ll want to ask your potential advisor. Be sure to ask about fee structures, fiduciary duties, certifications and minimum portfolio balances. Don’t be afraid to schedule multiple consultations with competing companies until you find one that’s right for you. 

Are Investment Advisors Worth it? 

You might wonder whether working with an investment advisor gives you any actual gains you wouldn’t have received if you managed your portfolio yourself. Research shows that there is a quantifiable monetary benefit that comes with working with an investment advisor. According to a study conducted by Vanguard, one of the nation’s largest RIAs in the world, having a financial advisor on your team gives you an average of 3% higher returns compared to self-directed investing.

This can be a huge financial gain for you if you’ve got a massive amount of assets under management. However, if you’re just getting started in your investing career, you might not see enough of a return to justify your expense. As a general rule, the larger your portfolio, the more an investment advisor can do for you.