Registered Investment Advisor Qualifications
A registered investment advisor is an individual who meets certain state and federal requirements, in exchange for which he is allowed to help investors make their investment decisions. Generally, a registered investment advisor must also become part of an investment firm, or create his own company, in order to find clients to whom he can offer advice.
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Why Investment Advisors Register
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The financial system is built on trust, and one way to ensure that trust is to have certain minimum standards for an advisor acting on behalf of investors. These standards include professional codes of contact, minimum amounts of knowledge necessary to perform the job and ethical requirements. The Securities and Exchange Commission (SEC) is the entity responsible for creating national rules to govern investment advisors, and states also have their own regulations. These ensure that the average investor is getting quality advice on how to handle her assets.
Filing Form ADV
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The SEC requires investment advisors to register by filing what is known as a form ADV. This is a form that must also be updated annually. An investment advisor must also inform clients and possible future clients of her qualifications, including years in business, business practices, professional memberships and educational background. As part of these rules, the SEC also requires that an advisor disclose the size of her business, and its financial state, using various forms that can be filed with state and federal regulators.
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Fees to Register
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The SEC requires no fee to register as an investment advisor, and they do not require a fee for updating this registration. However, it may be necessary to have legal help, or the help of a more experienced advisor, in order to fill out the necessary paperwork. Thus, a prospective investment advisor should budget several hours and several hundred dollars towards the cost (in time and money) of filling out forms prior to completing the actual registration. Some states will also charge for form submission.
The Series 65 Exam
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While the federal government does not require tests for registration, most states do. For an investment manager with less than $25 million in assets, regulation will occur at the state level. In this case, the investor will be required to take the Series 65 exam, a standardized test that examines the prospective advisor's ability to understand financial terminology, give coherent advice to investors in a variety of financial circumstances, properly record and account for his activity and handle ethical issues and conflicts of interest.
Advantages of Registering
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For an investor, there are two main alternatives to working with a registered investment advisor. First, he can invest directly in an asset manager, such as a mutual fund or hedge fund. While this can be a more cost-effective solution, it has the disadvantage of being less customized to individual needs. In addition, investment advisors can offer their customers assistance in understanding and tolerating market price fluctuations. The other alternative is to work with a broker/dealer, who is not always obligated to put the client's interests first. While this offers more flexibility and a lower cost, the adversarial relationship can make it more expensive in the long run.
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References
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