What Is an Investment Advisor?

An investment advisor (also known as a stock broker) is any person or group that makes investment recommendations or conducts securities analysis in return for a fee, whether through direct management of clients' assets or by way of written publications. The precise definition of the term was established through the Investment Advisers Act of 1940.

An investment advisor with sufficient assets to be registered with the Securities and Exchange Commission (SEC) is known as a Registered Investment Advisor (RIA).

Investment advisors are also referred to as “financial advisors” and can alternatively be spelled as “investment advisers” or “financial advisers.”

What's an Investment Advisor?

How Investment Advisors Work

Investment advisors work as professionals within the financial industry by providing guidance to clients in exchange for specific fees. Investment advisors owe a fiduciary duty to their clients and are required to put their clients’ interests first at all times.

For example, investment advisors must ensure that clients’ transactions are given priority over their own and that any recommendations made to clients are well tailored to those clients’ needs,

preferences, and financial circumstances. Investment advisors must also be careful to avoid any real or perceived conflicts of interest.

One way in which investment advisors seek to minimize real or perceived conflicts of interest is through their compensation structure. Investment advisors are paid through fees which cause their own success to be linked to that of the client.

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

Investment advisors often have a level of discretionary authority which allows them to act on behalf of their clients without having to obtain formal permission prior to executing a transaction. However, this authority must be formally provided by the client, generally as part of the client onboarding process.

If investment advisors are operating within the U.S. they must register with the SEC if they manage assets totaling $100 million or more.

Investment advisors 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 advisors and their associated firms must also be kept, to enable oversight of the industry.