An investment advisor or broker is a person, company or group that chooses or recommends investments for a client. In exchange for their services, investment advisors charge a fee, usually a flat fee or a percentage of managed assets. These professionals are registered with and regulated by the SEC or their respective states.
Various types of investment advisors exist, such as asset managers, portfolio managers and wealth managers. Not everyone needs an investment advisor, but if you do, choosing the right one is a crucial step. If you need an investment advisor, clearly define what you need, then look for an advisor who meets your requirements. Here’s how to get started.
What do investment advisors do?
Investment advisors manage the investment side of your financial life, helping you allocate money to profitable short- and long-term investments. While other financial advisors may focus on all aspects of your financial life, an investment advisor focuses primarily on investments.
Typically an investment advisor develops an investment portfolio that is well diversified and manages risk, including assets such as stocks, bonds and funds as well as alternative investments such as real estate and possibly private equity. Because of this relatively narrow focus, an investment advisor may not handle broader financial concerns such as estate planning or taxes.
Do I need an investment advisor?
Investment advisors provide a valuable service, but they aren’t necessary in all cases. They typically work with individuals who have a higher net worth. More importantly, they help people manage investments, such as stocks, bonds and mutual funds. If you haven’t started your investing journey yet, an investment advisor likely isn’t the right choice for you.
Conversely, if you have a significant amount of investments and need help managing them, an investment advisor can help you develop an investment plan and build a portfolio that matches your financial goals.
Consider consulting an investment adviser if you have a large investment portfolio, as some investment advisors may require a minimum of $100,000 in assets. If you’re just starting out or haven’t reached the minimum yet, you can still access investment advice. Just look to a different source.
- For an individual approach, you can meet with a financial advisor or certified financial planner, which may be one and the same, who doesn’t have a minimum.
- For a cheaper, yet still effective option, check out a robo-advisor or select a target-date fund to create a diversified portfolio.
You may also want to consider an investment advisor if you are nearing retirement, as they can help you develop a plan to manage and draw down your investments. And generally, if your finances are complex (and you meet any minimums) an investment advisor can be helpful.
Whether it’s building an investment portfolio, planning for retirement, saving for college or buying a home, partnering with an investment advisor can have many benefits.
Differences between an investment advisor and a financial advisor
Although people often use the terms financial advisor and investment advisor interchangeably, there are important differences between the two.
| Investment advisor | Financial advisor | |
| Role | Investment and wealth management | General financial help and planning |
| Regulation | SEC/state | Varies; fiduciary or suitability |
| Client type | Generally higher net worth individuals | All individuals |
| Fee structure | AUM-based or a flat fee | Varies (fee-only, commission) |
For example, the Securities and Exchange Commission (SEC) has outlined rules for investment advisors to protect investors, including their fiduciary duties to clients. A fiduciary duty means that the advisor must take actions in a client’s best interest, such as exercising good faith, loyalty, confidentiality, prudence and other qualities.
Whereas investment advisors must put clients’ interests first, financial advisors — a term that often refers to various investment professionals, such as money managers, stockbrokers and insurance agents, among others — are held to a less stringent standard.
In essence, these kinds of financial advisors can make “suitable” recommendations for clients. While those recommendations might be good, they might not be the best or the best for the client’s situation. Other key differences include fee structures, professional responsibilities and the government bodies that regulate these two groups.
Investment advisors, for instance, often operate under fixed, fee-based models, where they charge a percentage regardless of how much you invest. Annual fees typically fall somewhere around the 1 percent mark, which translates to $1,000 for every $100,000 you have with the advisor. Their fees rise as your assets increase.
On the other hand, financial advisors, such as broker-dealers, may earn commissions on products they sell to you, such as annuities or life insurance. However, other financial advisors may work under a fee-only model, receiving a per-hour fee for the work they perform.
Types of investment advisors
In addition to delivering tailored investment advice, investment advisors can wear multiple hats, providing a combination of financial planning, portfolio management, and even trading services – if they have the proper license. So, it’s essential to know what they offer and the fees involved.
Common titles for investment advisors include:
- Asset managers
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By learning about your long-term financial objectives and risk tolerance, asset managers select investments such as equities, real estate and commodities. They often provide a broad range of investments beyond stocks.
- Portfolio managers
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Mainly focusing on stocks and bonds, portfolio managers may specialize in areas of the market like consumer discretionary stocks, buying and selling holdings as opportunities emerge. They may also manage a broad investment portfolio.
- Wealth managers
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Catering to high net worth individuals and families, wealth managers have dedicated teams of financial experts covering every aspect of investment advisory services.
- Financial planners
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Providing counsel on budgeting, maximizing employer benefits, saving for retirement, selecting insurance coverage, and other matters, financial planners focus on personal and financial well-being.
Regardless of their job title, the SEC regulates investment advisors with $110 million or more in assets under management, while state regulators oversee advisors with up to $100 million in assets. Advisors in between those amounts may register with the SEC but are not obligated to.
How much does an investment advisor cost?
Investment advisors may be paid a flat fee for their work, but it’s more common for them to be paid as a percentage of the assets they manage. An annual fee of 1 percent of the managed assets would be a typical charge, though some may charge less.
Investment advisors with an AUM-based fee structure typically charge between 0.5% and 2%. If an investment advisor manages a $750,000 portfolio for you, this means paying fees between $3,750 and $15,000 annually. These fees are common for investment managers with whom you have an ongoing relationship.
This fee structure creates some alignment between the client and advisor, since their fee grows as your assets grow. But it can be a costly arrangement over time, too, since that money comes off the top of your portfolio, whether you make money in any given year or not.
The flip side is that the investment advice is going to be mostly the same whether you have $100,000 or $1 million. So if you have more money, you’re paying more to the advisor without getting better returns.
How to choose an investment advisor
When selecting an investment advisor, consider your financial needs and objectives along with their specialties and certifications. As you begin your search, following these steps can be helpful:
- Determine your needs: As mentioned, there are several types of investment advisors, such as asset managers, wealth managers and portfolio managers. Determining what you need can help you find the right person.
- Search trusted directories: When looking for an investment advisor, consider organizations such as the National Association of Personal Financial Advisors or the CFP Board where you can search for candidates. These free resources let you explore advisors’ areas of expertise, certifications, minimum investment requirements and the fees involved.
- Check their credentials: Look for titles such as certified financial planner (CFP) or chartered financial analyst (CFA). Financial planners must undergo extensive training and experience requirements and pass a test. CFA charter holders have passed three comprehensive exams, met certain work requirements and have agreed to uphold ethical standards. You can double check credentials and licenses through the issuing agency, such as the CFP Board, or regulators, such as BrokerCheck by FINRA or the SEC.
- Do your due diligence: Regardless of the company’s size, due diligence is critical. From checking their fee structure to assessing their values, trust is one of the main factors in choosing an investment advisor. So don’t hesitate to seek referrals, review performance data, request a proposal and ask questions.
- Consider self-directed options: Investors who are more independent might consider robo-advisors. And for do-it-yourself investors, there are plenty of resources with free financial advice.
Ultimately, you want to feel good about trusting someone with your money, so take the time to listen and learn. And don’t discount the value of periodically reviewing your investments and staying engaged. You’ll want to understand the incentives of the advisor you’re working with and what their legal duty is to you. Here are some tips to choose the right advisor.
If you’re looking for an advisor in your area, Bankrate’s financial advisor matching tool can provide suggestions to get you started.
Bottom line
Before working with an investment advisor, ensure they are the right fit for you — and vice versa. Proper due diligence is always important. Check their fee structure in advance and ask plenty of questions during an initial meeting. This will help you make the right choice to establish an ongoing relationship that benefits you and your investments.
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