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Key Takeaways

• Financial advisors give investment advice in return for a fee or commission.
• RIAs are legally bound to act in their clients’ best interest.
• Broker-dealers execute trades and are paid commissions.
• Investment companies manage funds and adhere to the Investment Company Act of 1940.
• Mutual funds' management fees are a major part of their operating expenses.
• Get personalized, AI-powered answers built on 27+ years of trusted expertise.

What Is an Advisor?

A financial advisor provides investment advice to investors and is compensated by fee or commission. They may also actually invest capital for investors. For example, a financial advisor could be a broker-dealer that executes trades for clients. Or they could be a registered investment advisor (RIA) that has a fiduciary duty to advise in a client's best interest.

A Closer Look at Financial 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.1

Insights Into 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.2

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.

Fast Fact

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.

Exploring Investment Companies and Their Role

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 1940.1

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.3

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.43 Also, FINRA offers its own online tool, BrokerCheck, to investors for their research into investment professionals.5