Do You Need Investment Advisors?

Gone are the days when people were content to invest in safe bank deposits and treasury bonds. With increased interest in investing in the stock market shares, mutual funds and other types of financial investment instruments, an average investor is faced with an array of choices. Deciding where to invest your money can be confusing and for an unseasoned investor, a risky proposition. Investment advisors can help you make informed investment decisions to ensure optimal returns and capital appreciation for your savings.

This article explores the role played by investment advisors, their duties according to US law and how they can help you have an optimal investment portfolio.

Who are Investment Advisors (IA)?

As the name implies, investment advisors are firms or individuals who give financial investment advice. The advice can be in the form of choosing the best stocks for you to buy, deciding market strategies on when to buy sell or hold, advising on how best to diversify your portfolio and guide you in foreign investments if needed.

Investment advisors can be either registered or unregistered. In the US, they need to be registered with the Securities and Exchange Commission (SEC). They can even be registered with regulatory authorities in local states.

If the total assets under management of an investment advisor are less than USD 25 million, the individual or firm can be registered or licensed under State registration rules. In case of assets exceeding USD 25 million, they can be licensed and covered under federal laws.

Advisors of investments typically charge a fee for their services.

The investment advisor industry in the US is strictly regulated and covered by provisions in the US law.

Role of Investment Advisors

Let's take a look at some of the duties of an advisor of investment in the US: -

• Advise on investments in securities - Advisors on investment strategies must provide clients with advice on buying and selling of securities. The individual or firm can inform the client on the best available choices to include in a stock portfolio. Depending on the market conditions, advice to hold on to shares or to exit the stock can also be given. Consultation can be given to retail investors or individuals and even to other entities such as mutual funds, which have a diversified array of stock portfolios.
• Putting the best interest of the client first - Investment advisors in the US have fiduciary responsibility. This means that they are required to put the interests of their clients above their own interests and ensure that the client gets the optimal investment advice. Fiduciary responsibility also means that if instances of conflict of interest in the case of advisors are shown, then the client can pursue legal action against the firm or individual.
• Safeguard clients' assets and maintain records - An investment advisor also have a responsibility to maintain detailed records of all client transactions if the advising firm or individual is directly involved in the investment activities of the client and have access to client assets. In such cases, the client needs to get a statement every three months showing the status of the assets as well as what transactions have taken place regarding the securities of the client.

Alternative Investment Advisors and the SEC

Traditional avenues of investments include stocks, government or corporate bonds and real estate investment. Investments in other assets such as private stocks or equity, hedge funds or art are considered to be alternative investments. Alternative investment advisors can suggest clients on aspects such as buying collector's items or a rare bottle of wine. Advice on private equity, which is securities not trading on the stock market, can also be given by investment advisors if the client's financial goals are for higher returns.

Recently, the SEC took note of the lack of adequate regulation over alternative investment advisors in the US. The Office of Compliance Inspections and Examinations (OCIE) of the SEC instructed all alternative investment advisors dealing in private equity in the US in September 2010 to report on due diligence processes being followed. The OCIE seeks to ascertain whether any conflict of interest exist while giving such type of investment advice.

The SEC action follows some scams involving private equity and alternative investments such as the Madoff Ponzi scam. In March 2010, the SEC charged an alternative investment advisor in Ohio with defrauding clients by falsifying statements of accounts and hiding clients' losses. The charged advisor had also bought property using clients' assets. The SEC has decided to stringently regulate advisors of alternative investment to prevent such scams.

Diversified Investment Advisors

The golden rule in investment strategies is never to put all your eggs in one basket. The key is to balance risk with safety. Diversified investment advisors can ensure that your assets are spread across sectors and in various types of investments such as bonds, stocks and alternative investments. This can ensure that if there is a downturn in one sector, only a portion of your investment portfolio is affected.

Diversified investment advisors can also help you look beyond local investments and look at investing in foreign stock markets or mutual funds. Some mutual funds offer portfolios such as emerging economies funds, which invest in assets and bonds in countries such as Brazil, China or India. There are also index funds which track foreign stock market indexes.

Taking the help of diversified investment advisors can ensure that you take informed decisions on which foreign market can give you optimal returns.

Regulatory agencies such as the SEC have resources for the common investor regarding choosing investment advisers in its website. It provides information such as registration information and fee payment methods of investment advisors. SEC's website also tells investors how to find out if the particular investment advisor has had problems with regulatory authorities.