Advisor: What They are, What They do, Investment Companies

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Liz Manning
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Liz Manning has researched, written, and edited trading, investing, and personal finance content for years, following her time working in institutional sales, commercial banking, retail investing, hedging strategies, futures, and day trading. 

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Updated June 19, 2022
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What Is an Advisor?

An advisor is any person or company involved in providing financial advice for payment. Advisors may advise people about investing and investments. Or they may actually invest capital for investors.

Registered investment advisors (RIA) and investment advisory companies (IAC) are two registered entities that investors look to for investment management. They're also known generally as investment advisors or financial advisors.

Key Takeaways

  • A financial advisor provides investment advice to investors and is compensated by fee or commission.
  • A financial advisor could be a broker-dealer that focuses on executing trades for clients and earns a commission by doing so.
  • A registered investment advisor (RIA) is a financial advisor registered with either the SEC or a state securities regulator.
  • RIAs must act according to the fiduciary standard, giving only advice that is in a client's best interest.
  • An investment management company that manages funds for investors is considered a financial advisor.

Understanding Advisors

Some advisors have expertise in investment management. Registered investment advisors provide financial advice and comprehensive personal investment management services.

Investment advisory companies manage publicly traded fund portfolios for investment by individual investors. Both types of advisors provide important financial services and are required to follow specific rules detailed in U.S. government legislation.

Registered Investment Advisors

Registered investment advisors serve the needs of individuals. They are often classified into two categories based on their services. Financial advisors provide comprehensive services and are required to follow the fiduciary standard. Broker-dealer representatives must only adhere to the suitability standard. U.S. legislation in the Investment Advisers Act of 1940 outlines their obligations.

An individual will typically choose either a full-service financial advisor or a broker-dealer representative based on which best serves their individual needs.

Full-service financial advisors can help clients with long-term financial planning, holistic asset management, individual securities trading, and more. They typically charge fees that are a percentage of the amount of assets that they manage. They are governed by the fiduciary standard, which requires due diligence to ensure that investments and investment decisions are in the best interest of the client.

A broker-dealer representative will focus on executing trades directed by the client and may have broader access to market securities than a standard discount brokerage platform.

Broker-dealer reps are paid on commission. They must only follow the suitability standard, which requires them to ensure that the traded security is a logical fit for the client. They are not held to the broader fiduciary standard.

The Registered Investment Advisor designation indicates that a financial advisor is registered with the U.S. Securities and Exchange Commission or their state securities regulator. The Financial Industry Regulatory Authority (FINRA) provides the public with details on registered advisors.

Investment Companies

Management investment companies can be considered investment advisors, as they are responsible for directing the investments of the funds they manage. Management investment companies that offer publicly traded funds are required to adhere to the rules and regulations of the Investment Company Act of 1940.

A fund advisor has the primary responsibility for the investment performance of a fund. Advisors receive an annual management fee, which is computed as a percentage of a fund's assets under management.

The fee makes up a large portion of a fund's operating expenses. For fund investors, judging the quality of a mutual fund's portfolio management is one of the most important considerations for investing in a fund.

What's a Financial Advisor?

A financial advisor is a person or company that provides financial advice in return for payment. A registered investment advisor (RIA) is a financial advisor registered with the SEC or state securities regulator. RIAs have a fiduciary duty to provide financial and investment advice that is always in the best interest of a client. The SEC has found that unregistered advisors commit the majority of investment fraud in the U.S.

What Kind of Advice Will a Financial Advisor Provide?

A financial advisor should provide advice that's based on your particular needs. This may include information on topics such as investing and investments, saving for important life events, retirement planning, debt management, estate planning, and tax planning.

What Entity Oversees RIAs?

Registered investment advisors are advisors registered with the SEC or a state regulator. To find out which regulator oversees an RIA in which you're interested, ask the RIA. To double-check, you can use the SEC's investment professional search tool to get details. Also, FINRA offers its own online tool, BrokerCheck, to investors for their research into investment professionals.

Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.

  1. U.S. Securities and Exchange Commission. "Laws and Rules."

  2. Government Printing Office. "Investment Advisers Act of 1940," Page 7.

  3. Investor.gov. "Investment Adviser Registration."

  4. Investor.gov. "Check Out Your Investment Professional."

  5. FINRA. "BrokerCheck."

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