# Understanding Investment Advisers: Role, Function, and Registration

> **Definition**
>
> Investment advisers are financial professionals who make investment recommendations or conduct security analysis in exchange for a fee.

## What Is an Investment Adviser?

An investment adviser makes investment recommendations or conducts securities analysis for a fee. They are sometimes called a [stockbroker](https://www.investopedia.com/ask/answers/09/life-of-stock-broker.asp).

Investment advisers often have the authority to manage clients' assets and must adhere to fiduciary standards. This means they have a responsibility to prioritize their clients’ interests at all times.

In the United States, investment advisers must register at the state level. They must also register with the U.S. [Securities and Exchange Commission (SEC)](https://www.investopedia.com/terms/s/sec.asp) if they manage $100 million or more in client assets. SEC-registered investment advisers are known as [Registered Investment Advisers (RIAs)](https://www.investopedia.com/articles/financialcareers/06/whatisaria.asp).

Read on to learn more about investment advisers, including an example of how they work in real-life scenarios to manage retirement funds effectively.

### Key Takeaways

*   Investment advisers make recommendations and conduct security analyses for fees, guiding clients in managing their assets.
*   They must prioritize clients' interests, ensuring that clients' transactions get priority and recommendations fit clients' needs.
*   Advisers with assets over $100 million register with the SEC; others register at the state level.
*   Compensation structures align advisers' interests with clients' success, often involving fees linked to asset performance.
*   Advisers may have discretionary authority, allowing them to make transactions without prior client permission.

## Operations and Duties of Investment Advisers

Investment advisers work as professionals within the financial industry by providing guidance to clients in exchange for specific fees. Investment advisers owe a [fiduciary duty](https://www.investopedia.com/ask/answers/042915/what-are-some-examples-fiduciary-duty.asp) to their clients and are required to put their clients’ interests first at all times.

Investment advisers must prioritize clients' transactions over their own and tailor recommendations to meet clients' needs and financial situations. Investment advisers must also be careful to avoid any real or perceived conflicts of interest.

One way in which investment advisers seek to minimize real or perceived [conflicts of interest](https://www.investopedia.com/terms/c/conflict-of-interest.asp) is through their compensation structure. Investment advisers are paid through fees which cause their own success to be linked to that of the client.

For example, an investment adviser might charge a management fee based on the size or performance of the client’s assets. That way, the investment adviser has a clear financial motive to work toward the client’s success.

Investment advisers often have a level of [discretionary authority](https://www.investopedia.com/terms/d/discretionary-investment-management.asp) allowing them to act on behalf of their clients without having to obtain formal permission prior to executing a transaction. However, clients must formally grant this authority, typically during the onboarding process.

If investment advisers are operating within the U.S., they must register with the SEC if they manage assets totaling $100 million or more. Investment advisers with lesser amounts of assets are still eligible to register, but they are only required to register at the state level. Additionally, records regarding investment advisers and their associated firms must also be kept, to enable oversight of the industry.

### Did You Know?

An investment adviser can manage clients' assets directly or provide advice through publications. The precise definition of the term was established through the [Investment Advisers Act of 1940](https://www.investopedia.com/terms/i/investadvact.asp). Investment advisers are also called financial advisors, and the term can be spelled as "investment advisor" or "financial advisor."

## Practical Example: Working With an Investment Adviser

Suppose you are a 65-year-old retiree who has just hired an investment adviser to manage your retirement funds. The adviser you chose was recommended for her close adherence to the best practices of the investment management industry.

You recently downsized your home and have $1 million in combined retirement savings. You have some experience investing and are comfortable buying [blue-chip stocks](https://www.investopedia.com/terms/b/bluechipstock.asp). However, given your age and [risk tolerance](https://www.investopedia.com/terms/r/risktolerance.asp), you are mostly interested in preserving your principal and ensuring you have adequate money to fund your lifestyle for the next 20 or more years.

At your first meeting, your investment adviser began by asking you a series of questions designed to thoroughly understand your retirement plans, financial circumstances, risk tolerance, investment objectives, and other factors relevant for assessing your needs. She carefully explained her compensation structure (a mixture of flat fees and performance fees) and addressed the measures she takes to minimize real or perceived conflicts of interest. She explained that as part of the onboarding process, she would obtain discretionary authority over your investment accounts and would have a fiduciary responsibility toward you as her client. Lastly, she directed you toward resources where you can verify and monitor her registration status.

After thoroughly answering your questions, your adviser suggested various potential investment strategies designed to best meet your needs given your budget and preferences. After careful discussion, you agreed on a course of action and completed the ongoing process.

In the months and years ahead, you would continue to have scheduled communication with your adviser where she would update you on the status of your investments and address your concerns.

## The Bottom Line

An investment adviser makes investment recommendations or conducts securities analysis in exchange for a fee.

Investment advisers have a fiduciary duty, meaning that they must prioritize their clients' interests and avoid conflicts of interest.

Investment advisers in the U.S. must register at the state level, and those managing more than $100 million in assets have to register with the SEC.

The compensation structure of investment advisers ties their success to that of their clients, creating a financial motive to prioritize client success.

Your investment adviser will likely:

*   Ask you questions to fully comprehend your needs, plans, financial circumstances, risk tolerance, investment objectives, and other relevant factors
*   Customize investment strategies based on your financial circumstances and goals
*   Outline their compensation structure and their measures to avoid conflicts of interest
*   Explain their discretionary authority over your investment accounts and fiduciary duty toward you as their client
*   Steer you to resources to monitor and verify their registration status  
    

> **Article Sources**
>
> 1.  U.S. Securities and Exchange Commission. "[General Information on the Regulation of Investment Advisers](https://www.sec.gov/investment/divisionsinvestmentiaregulationmemoiahtm)."
>     
> 2.  U.S. Securities and Exchange Commission. "[Regulation Best Interest and the Investment Adviser Fiduciary Duty: Two Strong Standards that Protect and Provide Choice for Main Street Investors](https://www.sec.gov/news/speech/clayton-regulation-best-interest-investment-adviser-fiduciary-duty)."
>     
> 3.  U.S. Securities and Exchange Commission. "[Laws and Rules](https://www.sec.gov/investment/laws-and-rules)."
>     
> 4.  U.S. Congress. "[Investment Advisers Act of 1940](https://www.govinfo.gov/content/pkg/COMPS-1878/pdf/COMPS-1878.pdf)." Page 3.