They tend to fall into two distinct categories:
Depending on the nature of the relationship, investment advisors charge fees calculated as a percentage (e.g., 1%) of assets under management (see: fee-only financial advisor), on an annual basis, an hourly or on a "flat fee" basis.
Common examples of investment advisors include pension fund managers, mutual fund managers, trust fund managers and also individuals, partnerships, or corporations which have registered under the Act, and those who fall within certain exemptions. Stock brokers (known as "registered representatives" under U.S. federal law and licensed in the various states are not necessarily (and normally are not) registered investment advisors).
In general, under U.S. law, investment advisors owe their clients an ongoing fiduciary duty to provide full and complete disclosure of all fees, conflicts of interest, and if so authorized, to exercise discretion in selecting investments with only their clients' best interests in mind.
In many cases, a registered investment advisor (RIA) is a corporation or partnership while the person actually providing the advice is an investment advisor representative (IAR) of the advisor organization. Investment advisor representatives and individuals registered as investment advisors are sometimes certified as a Certified Financial Planner (CFP) practitioner by the Certified Financial Planner Board of Standards, Inc. or a Chartered Financial Analyst(CFA) holding a charter from the CFA Institute after they have passed the appropriate examinations, have agreed to abide by a code of ethics, and have maintained the required continuing education credits. The CFP and CFA credentials are not, however, required for registration as a registered investment advisor.
The registration process to become an investment advisor is becoming increasingly complex, with examination requirements, books and record retention and increased state regulation of smaller investment advisors. See, Registration of Investment Advisors
Financial advisors need to pass an exam to practice (Financial Planning Certificate) and are authorised by the Financial Services Authority, a UK government qango that needs to be satisfied the advisor is a “fit and proper person” before he/she can practice.
Financial advisors are either tied, multi-tied, or independent.
As the classifications suggest a tied advisor can only recommend financial products marketed by the company he or she represents. Typically that company employs him or her but in some cases he or she can work for that organisation under a type of self employed contract that usually precludes other paid work of any kind.
A multi-tied agent performs a similar role except that he or she represents a number of different companies. This is sometimes referred to as the panel system.
An Independent Financial Adviser must offer whole of market advice and, in addition, must offer prospective clients the choice of paying a fee for advice, rather than being remunerated via commission from the financial product provider.
Tied and multi-tied advisors are nearly always rewarded via commission although in some cases (and if the advisor is employed rather than self employed) commission may be expressed in notional terms to justify a salary.
In the UK there has been much debate in the media about the effectiveness of financial advisors, especially in situations where there is perceived bias toward certain products which offer high commission.
There are issues of client accountability as the advisor — either tied or independent — has a moral duty to achieve this for clients. Best advice is difficult to achieve if the advisor is not independent; therefore a type of compromise exists where a tied or multi-tied advisor must recommend the most appropriate financial product available to him or her to suit their clients needs even if a more appropriate product is available in the market place.
In the UK many believe that impartial advice can be obtained only by consulting an independent financial advisor.
Supreme Court Ruling on Excessive Fee Claim Against Mutual Fund Investment Advisor May Have Implications for ERISA Excessive Fee Cases.(Employee Retirement Income Security Act of 1974)
Jun 10, 2010; This decision is expected to have a substantial impact for plans and fiduciaries defending the rash of pending litigation under...