While investment advisors and financial advisors may walk the same and quack the same, they are not the same duck. The Financial Industry Regulatory Authority (FINRA) and the Securities Exchange Commission (SEC) have clearly defined investment advisors as distinct from financial advisors.
The term financial advisor is a generic one that can encompass many different financial professionals, although it most commonly refers to brokers (individuals or companies that buy and sell securities). Investment advisor, on the other hand, is a legal term and thus has a more clear-cut definition – or at least as clear as legalese is apt to be.
Investment Advisor vs. Financial Advisor
| Investment Advisor | Financial Advisor |
| A person or firm that provides advice, reports or analyses on investments |
Typically a broker who buys and sells securities for themselves or others |
| Held to the fiduciary standard | Held to the suitability standard |
| Regulated by the SEC and/or state regulatory authorities | Regulated by the SEC and FINRA |
| Must pass the Series 65, Uniform Investment Adviser Law Examination, or equivalent exam | Must pass the Series 6 and/or Series 7 exam |
What Is an Investment Advisor?
The SEC has a three-prong definition of an investment advisor. It states that to be an investment advisor, you must: (1) for compensation, (2) be engaged in the business of, (3) providing advice or issuing reports on individual securities.
In essence this means that the advisor is being paid for her advice or reports and regularly provides these advice or reports. The advice provided isn't limited to advising about individual securities. An investment advisor could advise on asset allocation, market trends or even just how to choose an advisor.
Investment advisor definition: An investment advisor is a person or firm that provides investment advice or produces reports or analyses of investment securities for compensation.
Under this definition, many professionals could be considered investment advisors. For instance, money managers, financial planners and investment consultants can all be registered as investment advisors. The SEC does make exceptions for certain professionals, like lawyers, accountants, engineers and teachers, who may find themselves incidentally providing investment advice as part of their business practice.
Brokers are also allowed to advise without needing to register as an investment advisor provided the advice they give is "solely incidental" to their work as a broker and they are not given "special compensation" for it, according to the SEC.
The other key distinction between investment advisors and financial advisors who work as brokers is that investment advisors are held to the fiduciary standard, while brokers may operate under the more lax suitability standard. As a fiduciary, investment advisors must act and advise in the best interest of their clients, even if doing so is not in the advisor's best interest. The clients always come first.
Advisors under the suitability standard, on the other hand, are required only to provide recommendations which are "suitable" to their clients. The recommendation doesn't need to be the "most suitable" option – there could be a better product out there – but as long as the investment isn't bad for the client, the advisor can recommend and sell it. As you can probably see, this leaves the door open for some conflicts of interest and me-first behavior on the part of brokers.
What Investment Advisors Do
Many investment advisors provide financial advice and guidance to individual investors much like financial advisors. That advice can range from investment selection to portfolio management or even just how to choose other advisors to work with.
While working directly with individual investors is the most recognized function of investment advisors, some prefer a more back-end role. They may manage the investments in client portfolios while leaving the face-to-face guidance and planning to other advisors. Or they could focus on financial analysis by researching and writing industry reports on investments or market trends.
How to Become an Investment Advisor
Before discussing how to become an investment advisor, a distinction should be made between investment advisor firms and individuals. Individuals who fall under the definition of investment advisor are technically called investment advisor representatives (IAR). So if you want to provide investment advice to clients, you would become an investment advisor representative. The firm you work for, on the other hand, would be an investment advisor.
If you're a sole proprietor, this means you could be both an IAR and investment advisor. Your firm would need to register as an investment advisor with the SEC (if it has at least $110 million in assets under management) or the state (if it has less than $100 million to $110 million in assets under management) while you would need to be registered with your state as an IAR.
Not every state licenses investment advisor representatives. Those that do typically require individuals to pass the Series 65, Uniform Investment Adviser Law Examination, or an equivalent exam. Even if your state doesn't require a license, your employer may require you to obtain one.
You have two years after passing the exam to start working as an investment advisor representative. If you wait longer than that two-year window, you'll have to retake the exam. And considering it's a three hour, 140-question exam, avoiding retakes is ideal.
