Financial Investment Advisor Representative, Defined

I hope Wheel of Fortune fans in the audience will appreciate the “before and after” format of the title. Today I will discuss definitions of financial advisor, investment advisor, and investment advisor representative.

I alluded to the terminology confusion here. According to Investopedia:

     > An investment advisor (IA) is defined by the Investment Advisers Act
     > of 1940 as any person or group that makes investment recommendations
     > or conducts securities analysis in return for a fee, whether through
     > direct management of client assets or via written publications. An
     > IA who has sufficient assets to be registered with the SEC is known
     > as a Registered Investment Advisor, or RIA.

With regard to spelling, “investment adviser” was utilized by Congress under federal law. “Investment advisor” seems to be a more popular form within the securities industry. Either are acceptable and at times they are used interchangeably.

     > IAs… [often] have a level of discretionary authority, allowing them
     > to act… [on behalf of] clients without having to obtain formal permission
     > prior to… [acting]. However, discretionary authority must be formally
     > provided by the client [in advance].

You could hire me to trade securities in your account the same way I trade for myself. You would be granting me discretionary authority to do this. I must be licensed in order to get paid, however.

     > An investment advisor (IA) can be either an individual or a company.
     > If you are providing investment advisory services as an employee of
     > an IA, you are actually an investment advisor representative (IAR).

According to the Uniform Securities Act, an IAR is:

1. An individual employed by or associated with an investment advisor.
2. An individual employed by or associated with… [an IA] who makes any recommendations or otherwise gives investment advice regarding securities, manages accounts or portfolios of clients, determines which recommendation or advice regarding securities should be given, and/or provides investment advice.
3. Anyone who holds herself or himself out as providing investment advice and/or receives compensation for such.
4. Anyone who supervises employees who perform any of the foregoing.

I could create an LLC, a C-corp, or an S-corp for whom I, personally, would work as a representative (IAR).

#3 also defines an IA. One further detail may differentiate the two:

     > Look Out! If a person meets the above criteria for IAR he or she
     > must register with the state.

An IA may or may not have to register with the state depending on AUM and in what states its clients reside. An alternative to registering with the state is registering with the SEC. Specific rules are beyond the scope of this post.

I have been using the term “financial advisor” (also spelled “adviser”) to describe those interacting with the end (retail) client. This is not an official criterion, however. Investopedia says that financial advisor:

     > is a generic term with no precise industry definition, and many
     > different types of financial professionals fall into this general
     > category. Stockbrokers, insurance agents, tax preparers, investment
     > managers and financial planners are all members of this group.
     > Estate planners and bankers may also fall under this umbrella.

Nothing is official with regard to “financial advisor” whereas IA and IAR are legal terms. This explains much of the confusion.

     > A financial advisor provides financial advice or guidance to customers
     > for compensation. Financial advisors, or advisers, can provide many
     > different services, such as investment management, income tax prep.
     > and estate planning. They must carry the Series 65 license to
     > conduct business with the public; a wide variety of licenses
     > are available for the services provided by a financial advisor.

Other licenses include Series 7, Series 63, and Series 66. The 7 is administered by the Financial Industry Regulatory Authority (FINRA) whereas the North American Securities Administrators Association (NASAA) oversees the 63 and 66 exams.

The licenses pertain to people (i.e. IARs) rather than business entities (most IAs). My 2014 Series 65 license expired because I did not get state-registered as an IAR within two years. I now have to retake the exam to be paid for financial advice or discretionary trading services.

     > What may pass as a financial advisor in some instances may be a
     > product salesperson, such as a stockbroker or a life insurance agent.

I have referred to “glorified salespeople” multiple times.