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Finding a trustworthy investment advisor is akin to dating. It requires time, effort and a lot of discernment. After all, developing a relationship with an investment advisor who knows your investment needs and financial goals is allowing someone a peek into an intimate part of your life. And when you choose one, this person could be in your life for years.
If you’re not looking for a human advisor, you can turn to one of the best robo-advisors to access smart investment management with a lower overall expense. Either way you go, you’ll need to spend some time vetting potential candidates and seeing how they fit your needs.
To aid you in your search, here’s a guide that walks you through various types of investment advisors, the considerations you should keep top of mind, and the resources to find them.
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 lower-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 usually handle broader financial concerns such as estate planning or taxes.
Investment management statistics
Because of their fiduciary duty, registered investment advisory (RIA) firms – the legal entities registered to provide investment services – are one of the largest segments in wealth management, holding $114.1 trillion in assets under management (AUM) in 2022, according to a report from the Investment Adviser Association.
Key industry statistics
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There were 15,114 SEC-registered investment advisers in 2022, with 61.9 million clients.
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91.7 percent of investment advisers employ 100 or fewer people. Assets under management fell 11.1 percent in 2022, the first decline since 2008.
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In 2022, 62.8 percent of advisors had individuals as clients, including 56 percent that service non-high net worth individuals.
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Advisor offices in private residences grew by 25.6 percent in 2022 as more advisors use a permanently remote or hybrid work model.
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88.5 percent of advisors had less than $5 billion in assets under management in 2022.
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90.6 percent of industry assets were managed by firms with more than $5 billion in assets under management in 2022.
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The largest 190 firms managed 62.8 percent of industry assets in 2022.
Source: Investment Adviser Association
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.
Difference between a financial advisor and an investment advisor
Although people often use the terms financial advisor and investment advisor interchangeably, there are important differences between the two.
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:
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 usual for them to be paid as a percentage of the assets they manage. An annual fee of one percent of the managed assets would be a typical charge, though some may charge less.
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.
For example, to achieve a certified financial planner (CFP) certification, financial planners must undergo extensive training and experience requirements, and pass a test. Beyond selecting investments, CFPs take a more holistic approach to managing your overall financial situation.
The Chartered Financial Analyst (CFA) designation is highly regarded in the investment advisor industry. CFA Charterholders have passed three comprehensive exams, met certain work requirements and have agreed to uphold ethical standards.
One of the benefits of working with large investment advisory firms is that you’ll likely have access to multiple teams of professionals with diverse experience and qualifications. On the other hand, smaller investment advisory boutiques tend to offer more personalized services.
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, such as:
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What is your investment philosophy?
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Outside of a fixed rate or a percentage of assets, should I expect other fees?
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What type of clients do you primarily work with?
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How often can I expect updates on my investments?
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Beyond investing, do you provide estate and tax planning strategies?
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’s how to choose the right advisor.
How to find an investment advisor
When looking for an investment advisor, consider organizations such as the Financial Planning Association, 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.
Additionally, large financial companies such as Fidelity and Charles Schwab offer wealth management services, although the minimum investment requirements may be higher.
Other companies such as robo-advisors Wealthfront and Betterment, which use automated investment options, often have no minimum investment requirements. Plus, their fees are minimal compared to using a human advisor.
And for do-it-yourself investors, there are plenty of resources with free financial advice.
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
Growing your investments can be complex without the time, knowledge or resources. By partnering with an investment advisor who looks after your financial needs, you can delegate the task to a professional and instead focus on the things that you truly love to do.
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