A 2011 Securities and Exchange Commission study found many investors “do not understand the standards of care applicable to investment advisers and broker-dealers, found the standards of care confusing, and in particular, were uncertain about the meaning of the multiple titles used by investment advisers and broker-dealers.” One of the most common deficiencies found in SEC investigations of investment advisers is in the area of portfolio management. This implies portfolio managers are also financial advisers.
The Investment Advisers Act
While the term “investment advisor” is commonly spelled with an “o,” it refers to the legal term “investment adviser.” The legal definition is covered in the Investment Advisers Act of 1940. Indeed, if a person or company has at least $110 million in assets under management, they must register with the SEC as an investment adviser. State registration may be required for advisers not registered with the SEC. Although not all investment advisers are portfolio managers, the majority are. By law, portfolio managers are investment advisers and are subject to the same requirements.
An investment adviser is a fiduciary. Advisers must put the interests of the client above their own. This means advisers have duties of loyalty (to disclose conflicts of interest) and care (provide a basis for recommendations). Managing a portfolio is just one of the services you may get from an investment adviser. The adviser can call herself a portfolio manager, but investment counselor, investment manager and wealth manager work too. Furthermore, some investment advisers are also broker-dealers and have dual registration.
Brokers and Advisors
The manager could also be known as a registered representative or broker. A broker makes security transactions for other people. A dealer buys and sells securities to make a market. They're both required to make "suitable" recommendations to customers, which basically means they should be consistent with the interests of that customer, not the agent. As an investor, you may work directly with either one. However, if they're not also investment advisers, they're not held to the same standards of care.
If someone refers to himself as a portfolio manager, he probably considers his primary role to run a pool of assets such as a mutual fund, hedge fund or individual portfolios. By law, this person is still an investment adviser. If someone goes just by that title, he likely sees financial advice as his main job. He doesn't need to register as one unless he has a ton of assets under management. If the advisor also recommends securities, then he'd need to register as a broker.
- Securities and Exchange Commission: Study on Investment Advisers and Broker-Dealers
- Securities and Exchange Commission: Fiduciary Duty: Return to First Principles
- Financial Industry Regulatory Authority: Selecting Investment Professionals
- Securities and Exchange Commission: Securities Exchange Act of 1934
Kathryn Christopher has been writing about investments for more than 20 years. Her work has appeared in the "Journal of Alternative Investments" and numerous other academic and industry publications. She works at Wiggin Financial Planning, teaches for UMASSOnline from South Florida, and holds a PhD in finance from the University of Massachusetts.