Duties of a Financial Advisor

A personal financial advisor is entrusted with the job of evaluating the performance of companies or that of a portfolio of securities and providing valuable guidance to individuals regarding the suitability of investments.

Responsibilities of a Financial Advisor

Advising Investments
A financial advisor is responsible for assessing market conditions, compiling and analyzing socioeconomic data, and advising clients on the best investment opportunity. He is expected to be comfortable with tax laws and insurance and suggest suitable investment alternatives. Working with detailed financial records and charts are all a part of the game. The advisor is also expected to forge relationships with clients by focusing on need-based sales of investment products. The advisor is required to have the knowledge of legal and regulatory requirements and the guidelines laid down by the Financial Industry Regulatory Authority (FINRA) and Securities and Exchange Commission (SEC). Suggesting investments such as mutual funds, stocks and bonds; suggesting contributions to Individual Retirement Accounts (IRAs), retirement planning, real estate investment advice and many other services, come under the purview of his/her responsibilities.

Clarifying Risk and Reward
A financial advisor cannot ignore the client’s ability and the willingness to assume risks. The ability and the willingness to undertake risks coupled with the appropriate investment decision-making prowess will influence the return on investment. This is because risk and reward are directly proportional. Clients, who have a great deal of money and a long term investment horizon, may be better-off investing in more risky assets. People with a short term investment horizon need to have enough liquidity to meet their financial obligations. Hence, in such cases one of the duties of a financial advisor is to suggest investments that have a short maturity. Despite having the capacity for wealth generation, a person may choose not to invest in what he/she feels is a risky proposition. In this situation, the financial advisor should explain to the reluctant investor the concept of risk and reward, clarify the need for liquidity and make sure that time horizon of the investor matches the need for liquidity. A person, who is in his/her late 40s and has two children will generally have 3 time horizons. One coinciding with his/her retirement and the other two with the children’s college education. A good advisor will ensure that the return from investment coincides with the aforementioned time horizons when the need for liquidity is predominant.

Finding and Maintaining Relationships with Clients
Financial advisors essentially have the job of creating and maintaining their own client base. Client relationships have to be forged by suggesting superior management and wealth creation strategies. Meeting with clients on a regular basis, preparing and delivering presentations and seminars to clients are also important since they may enable the advisor to communicate the benefits of certain investments and the prudence of avoiding a few others.

A financial advisor should have one of the following qualifications: Certified Financial Planner (CFP), Chartered Financial Analyst (CFA) or Chartered Financial Consultant (ChFC). Although, people with Series 6, 7, and 63 may also be qualified to advise one regarding investments, it’s preferable if such advisors have at least 3-5 years of experience. Given that these advisors occupy a position of trust and confidence, advisors with significant assets register with the Securities and Exchange Commission (SEC). The Investment Advisors Act of 1940, a federal law that is enforced and interpreted by the Securities and Exchange Commission (SEC), applies to them.

Hopefully, the above article would have given one an idea about the responsibilities and the duties of a financial advisor. Choosing a financial advisor is a job that requires a great deal of thought and contemplation, since the advice that is dispensed may secure or ruin one’s financial position.

How to Become a Registered Investment Advisor

Registering an Advice Body
The advisor manages the assets of individuals and institutional investors, and performs the fiduciary duty to their clients of choosing the best possible investments for them, and providing full disclosure of transactions and ensuing fees. The investments may be in the form of stocks, mutual funds, hedge funds, or a combination of one or more forms of investment.

Registration of an investment advice body can be done in three ways, depending upon the sum of market value of assets being managed by that firm. This sum, commonly known as Assets Under Management (AUM), forms the basic registration criteria for the process of registration. While the exact definition of AUM is not clear, for registration purposes, the definition given under Form ADV Part 1, of the SEC, is used.

To register your investment advice firm with the SEC, you have to first determine the amount of AUM that your firm is managing. The amounts can be divided into 3 categories:

1. Up to $25 million
2. between $25 million and $30 million
3. above $30 million

Up to $25 Million
If your investment advice firm is not currently managing a sum of $25 million and does not anticipate managing $25 million within 120 days of registration, the firm has to register itself with the state in which it is operating.

$25 to $30 Million
If your AUM ranges between $25 and $30 million, you have the choice of either registering with the SEC, or with the state in which your firm is operating.

Above $30 Million
If your AUM is over $30 million, then the registration has to be done with the SEC.

Becoming an Investment Advisor
The first step is to figure out your AUM and the jurisdiction under which your investment advice firm falls. The firm has to pay the service provider fees to either the SEC or the state. If registered with the state, the fee comes to between $2,500 and $3,500, while for registering with the SEC, your firm might have to shell out anything between $4,000 to $8,000, depending upon the size and diversity of your portfolios.

As the firm is being registered, the registration bodies would feel compelled to test the knowledge of the investment managers and advisors, to ensure their accountability and investors’ safety. No test needs to be given if the advisor/manager is already qualified as a Chartered Financial Planner (CFP) or a Chartered Financial Analyst (CFA). But in case thy are not equipped with the above qualifications, they are required to give the Series 65 exam two years prior to registration, although many states allow registration on the basis of having given the Series 7 and Series 66 examinations.

Along with the examinations, you have to fill various forms such as the Registration Depository Form (IARD); Form ADV, which is mandatory for all investment advisors; Form ADV Part II, which covers all the information on activities of a registered investment advisor; and Form U4 which has to be filled by those people who represent the advisor.

Actually, a very small amount of advisory firms get themselves registered. A registration does not necessarily mean that the firm or individual is recommended by the SEC or any such body. However, it is considered safer to ‘bank’ upon registered advisors, as they are under the control and supervision of the SEC.

Choosing an Investment Advisor

Investment advisors provide advice to their clients on securities. In other words, they are individuals who specialize in advising people on investing in mutual funds, bonds, stocks, commodities, or real estate. Some advisors also manage their client’s portfolio of securities.

How are They Different from a Financial Planner?

While most financial planners are also investment advisors, all investment advisors may not be financial planners. Financial planners generally assess all aspects of a client’s financial needs such as estate planning, retirement, taxes, insurance, investments, and savings, and help in developing a financial plan or strategy for meeting his or her financial goals. On the other hand, investment advisors restrict themselves to providing advice on investing in an asset that is likely to generate good returns, or give regular income and/or dividends.

Why do People Need an Investment Advisor?

While most ordinary investors are intelligent people, with many of them being quite well-versed with the market, yet, they are often not very successful with their stint in the market. And that is quite understandable. After all, they make their living doing something else, hence, they do not have the expert knowledge that a professional would have. For example, if you were to fall ill, you would seek the expert help of a medical professional, even though you may be knowledgeable about various health related matters, or you would go to an auto-mechanic if your car had a break down, even though you may have a pretty good idea about cars.

Most ordinary people have a tendency of being ‘off’ in the timing of their investment. For instance, they buy when the market is high and not during the low periods. But to get the best returns on investment, it should be the other way round. The trouble is that most ordinary investors are influenced by factors like media hype, fear, and greed.

It’s here that a professional financial advisor can provide them the correct advice on how, when, and where to invest their money. However, make sure to hire a registered professional, who has a proven track record of successfully investing in securities or other assets.

What Services do They Provide?

Basically, they do all the legwork such as the research and analysis. Also, more importantly, their primary focus is kept on the market, particularly in the area of their specialization.

Since most of their energy and time is spent in researching, deliberating, and analyzing, it is natural for them to have a better sense of the market, along with its movements, compared to ordinary investors who cannot expend this kind of time and attention to it. They usually recommend the best products in the market, and those which suit the client’s needs and financial capacity.

Before hiring any financial professional, it is important for you to be cognizant about what kind of services you require, what he or she will deliver, if they have any kind of restrictions on what they can recommend, what services will you be paying for, their cost, and how they get paid.

How are They Paid?

Let’s look at some of the ways in which the advisors are usually paid:

– A fixed amount that both you and the advisor agree to.
– A commission based on the securities that they sell.
– A percentage of value of the financial assets that they handle for you.
– A combination of any of the above.

Each of these payment methods has its pros and cons. Find out from them about the nuances of each, and which would be most suitable for your needs. Lastly, check if the fees are negotiable.

Making that Decision

If you make a cursory search on the Internet, you would discover that there are innumerable registered advisors in the United States. However, not all of them maybe good, so how would you ensure choosing the right one? Well, most large-sized brokerage agencies maintain a list of investment advisors that they work with, including information about their past performance. However, this resource is not foolproof, since they have a tendency of recommending people who do their business through the agency, or buy products of their firm. Hence, you will have to be careful about conflict of interest issues.

Another way is to subscribe to any of the database services, which provide information as well as rankings, too, on such professionals. However, these services can be quite expensive.

Provided below are few of the factors that need to be kept in mind when hiring one:

– Make a verification of their record, taking into consideration their past performance.
– Check out their strategy to see if it will work in different market conditions.
– As much as possible, find out about their business operation.
– Check if the agency has any regulatory problems.

Apart from the above, you should also make sure that you can trust the advisor with your investment choices, and build a good rapport with him or her.