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Understanding the Role of an Investment Advisor

Understanding the Role of an Investment Advisor

September 26, 2023

When you want to make a savvy financial move, you likely turn to the experts to consult on what would make the biggest impact. An investment advisor is a core team member who can help you make sound financial decisions that impact your wealth for generations to come. For many would-be investors, the responsibilities and roles of an investment advisor still are not clear though.

What is the role of an investment advisor and how can you benefit from adding one to your team? Learn more about how investment advisors can benefit your portfolio today. 

What is the Role of an Investment Advisor?

The first thing that needs to be defined is exactly what an investment advisor is along with their key responsibilities. 

At the most basic level, investment advisors are paid in exchange for their advice regarding the many different types of investments and securities that you can make. They can educate you and make strategic moves on your behalf. The title "investment advisor" or "registered investment advisor (RIA)" comes with specific regulatory implications, such as registration with the Securities and Exchange Commission (SEC) or a state regulator. 

Registered investment advisors have a fiduciary obligation, meaning that they absolutely must act in the best interest of their client. This is perhaps the most important component of finding the right investment advisor. Anyone who does not consider themselves a fiduciary should be avoided. In this situation, they may make recommendations for your portfolio based on which investments will earn them kickbacks instead of what is in your financial best interest. 

Investment Advisor vs. Financial Advisor

Misunderstandings abound between the field of investment advisors versus financial advisors. Before you hire either one of these professionals, you should know which one you truly need. 

As previously discussed, investment advisors help you to make strategic decisions about your securities, active asset allocation, and overall investment portfolio. As previously mentioned, RIAs in the US are more strictly regulated and must act as fiduciaries. 

On the other hand, financial advisors are used for just about any type of financial transaction. They may give you more general, holistic advice about budgeting and paying down debt, maximizing your tax deductions, and making a general plan for your retirement. This title is typically less regulated and financial advisors may or may not have a fiduciary duty to act in the client's best interest.

If your finances are already mostly in order and it is direct planning for your investment strategy that you need, then an investment advisor registered with the SEC or state regulator could be the better money move for you. 

How Investment Advisors are Compensated

If investment advisors have to make recommendations based on your best interest and therefore do not earn a kickback on their investment advice, how do they make money? There are a few different ways that an investment advisor might be compensated:

  • Commission: Some investment advisors will charge you a commission based on the base funds that you plan to invest with them. This money is paid to them upfront when you make the initial investment. 
  • Flat-Rate Fee: Depending on what services you require, an investment advisor can charge you a simple flat-rate fee based on how much time they believe they will spend on your portfolio. There are no surprises with this method, and it does not matter how much you invest. 
  • Hourly Fee: If you think that you will only need minimal help from an investment advisor, hourly fees might be the way to go. You only pay for the time that an investment advisor spends on your portfolio without depending on how much you invest. 
  • Fee-Based: Sometimes, you will find that investment advisors do a combination of commission payments and either flat-rate or hourly fees. This is known as fee-based and can be a little more complex to sort out. Be sure to ask what the fees are upfront. 

Benefits of Working with an Investment Advisor

The role of an investment advisor is to help you make strategic investing decisions that help you achieve your financial goals. If you are serious about growing your wealth, working with an investment advisor is a great first step. Here are a few benefits to consider:

  • Fiduciary Duty: The primary benefit of working with this type of financial professional is that all Registered Investment Advisors with the SEC are required to have a fiduciary duty to you, as the client. Every move they make will be in your best interest. 
  • Earnings Based on Your Success: In addition, many RIAs are also earning their income based on your assets under management. If they want to make more money, they need to act in a way that grows your portfolio. Their income grows as your wealth grows, further aligning your benefit with theirs. If being a fiduciary is not enough proof that they are acting in your best interest, this is another way to ensure that they do. 
  • Public Record: Many people are hesitant to trust their wealth to someone they may have never met before. This is where doing your due diligence can come in handy. RIAs are required to fill out Form ADV with the SEC which details ownership and regulatory matters, as well as the services, fees, background, and strategies provided by the advisors in their firm. Everything is made readily available to you as the client. 
  • Referral Network: If you need help from someone outside of investment planning, then your RIA likely has the type of connection you are looking for. They frequently work with other professionals to help maximize the returns for their clients and may be able to make referrals to you for more complex situations. 

How to Choose the Right Investment Advisor

There are no specific education requirements to become an investment advisor, which can make selecting the perfect person a bit more challenging. Still, there are a few credentials you should keep in mind when looking for an investment advisor. 

For example, look for those who have a background in some type of finance work, accounting work, or economics. No matter what their unique educational background is, all RIAs have to pass the Series 65 exam through FINRA. 

Make sure that whoever you work with also has a fiduciary duty to act solely in your best interests. 

Of course, you can also make a great decision based on referrals and reviews. Take to the internet to see what sort of feedback their other clients have left behind for them. Any RIA or company that has too many negative reviews without responding to them may not be the best fit for your portfolio. 

Last but not least, you need to evaluate their fee structure to make sure that your work with them will be affordable and will not hinder your progress toward financial growth. Make sure you know what fee structure works best for your portfolio and then look for an investment advisor that offers you only what you need. 

Looking for an Investment Advisor?

Many parts of your portfolio–such as real estate and investments–can involve complex tax, legal, and financial aspects. In order to get the most of your investments, it's crucial to work with a team that can understand and strategize according to the bigger picture. 

At Magellan Planning Group, we offer our clients comprehensive financial, tax planning, and legal services coordinated under one roof so that you can get all your necessary financial help with a one-stop shop. With our Austrian economics approach to investing, we’ll help you understand your financial goals, estimate your likelihood to achieve those goals, and determine what needs to change to increase your chance of success.

Contact us today to learn more about how we can help you!