Investment adviser definition (FINRA SIE, Series 63, 65, 66)

Tyler York

What is an investment adviser? We go through the legal definition thoroughly and then analyze a practice question to show how it shows up on the FINRA exams, especially the Series 63, 65, and 66.

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Full Investment adviser definition (FINRA SIE, Series 63, 65, 66) video transcript:

The term investment advisor may seem like a pretty simplistic term. It's something that we use in our common English vernacular. Even the average American probably has an idea of what an investment advisor is.
But on this exam, it's important that you understand the legal characteristics and definition that we use for investment advisors and what we actually mean when we say the term. First, let's take a look at the legal definition of an investment advisor that comes straight from the laws and regulations that we discuss on this exam. Fair warning, this is a pretty long definition, but I promise we'll break it down in plain English when we're done with this. An investment advisor legally is any person who for.
Compensation engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in purchasing or selling securities, or.
Or who for compensation and is a part of a regular business issues or promulgates analysis or reports concerning securities. OK, that's a lot of information there. And now I think it probably makes sense why we have to be real careful as to what we actually mean legally speaking when we say the term investment advisor just from a basic point of view.
An investment advisor is typically a firm and when I say firm, I mean a business. Any business that provides you some kind of advice on what to do with securities is going to probably be considered an investment advisor. And that part there is the tricky part for understanding what you need to know for this exam. While the term investment advisor very much feels like a human being, you know someone that you would go to call, maintain a relationship with and they give you financial advice. That is not what we mean typically.
When we say investment advisor on this exam, an investment advisor is the company that typically will employ the people that you build relationships with and who manage your account, but they're not the actual people giving you the advice. So that's first and foremost. Investment advisors are firms, they are businesses. On the other hand, investment advisor representatives are the people that work for investment advisor firms and that's what the average person is probably thinking of when they think the term investment.
Advisor, They're actually thinking of an investment advisor representative. Of course, we will cover what we call Iars and a future chapter. Right now we're going to focus on the business itself. Going back to that legal definition that the paragraph that's in front of us right now, do you need to memorize this for the exam? Probably not, although you could be given a question where they just ask you straight up what is an investment advisor and this could be one of the answers they look for. That's certainly possible, but let's see if we can break this.
Down in a more digestible way so that we can actually remember what we need to know for the exam. An investment advisor is a person that provides investment advice as a regular part of its business for compensation. And with that, let's go ahead and breakdown the important words from our more summarized definition here. As you've already learned in the achievable materials, a person is a human being. Human beings can be persons, but also.
Legally formed entities are also persons. So could a business be a person? Absolutely. Businesses are persons, and I think that's important to point out. Anytime you see the word person in conjunction to even a broker, dealer or an investment advisor, you should probably be thinking of a firm, a business. Now, one thing to point out, it's kind of the frustrating part of this exam. For every rule or regulation you learn, there's probably 1 or several.
Exceptions to that rule or regulation, and there there certainly is 1 here. Could a human being be considered an investment advisor? Yes, that could occur if we have an investment advisor set up as a sole proprietorship. A sole proprietorship is A1 natural person business, and I'm saying natural person as in human being.
So it's A1 natural person business. That one person runs the business and it's kind of viewed as that one natural person in the business or almost one in the same. And that's one instance where we could say that an investment advisor is actually considered a natural person, a human being. Other than that, if an investment advisor is set up as a partnership, an LLC or a corporation of any form, we can easily assume that the business itself is the investment advisor. So bottom.
Online, anytime you see the word person in conjunction with a broker dealer or an investment advisor, this is a business that we're talking about 99% of the time. Now to the second part of our summarized definition provides advice on securities. We'll just stop there.
Advice and securities can take a lot of different forms. It could be as simple as hey I have an interaction with a client and I tell them my I think ABC stock is a good recommendation for their portfolio. Or it could be a client brings me $1,000,000 and I manage that $1,000,000 for them for the next 30 years on a daytoday basis.
Can take lots of different forms, but typically if you're giving any kind of advice on what to do with a security which is a specific type of investment, that is. When you're giving investment advice, I recommend you avoid over complicating this. If it sounds like there's any kind of advice being given on something relating to a security, you can safely assume it's security's advice to the third part as a regular part of their business. Now there's really two important terms here. It's the word regular in the.
Word business Regular of course just means this isn't just a one off thing. If a friend of mine came to me and paid me a couple $100 to give them some advice and securities once and that was it, I could certainly claim that I was not doing it as a regular part of my business even though I'm being paid and it seems like a business effort if I do it once and that's it, that's not regular.
So for something to be regular, we're looking for a frequency. Now, there's no definition to how frequent it must be, but there has to be at least some kind of frequency to the investment advice for a person to be considered an investment advisor. Now over to business. For something to be a business activity, this is pretty simplistic.
If I'm managing my friend's account or my family's accounts and I'm not charging them anything, and it's kind of a family type relationship, that's not a business. We're looking for an organization to put themselves out there and tell their clients, hey, pay me this much money and I'll provide you this type of service. This is another part of the definition that you just don't want to overcomplicate. Business is business. It's I'm giving you a service. You're paying me something for that.
That's the end of it. In the last part, compensation, you have to be paid for the investment advice that you're given. Now the tricky part here is not the word compensation. I think you probably understand what compensation is, right. Compensation can take lots of different forms. There are typical forms like, hey, you have me manage your account, I'll charge you a 2% of assets under management fee or you could pay me $1000 a year and I can give you a couple meetings throughout the year and we could talk about your portfolios. I give you some advice on what to do with your portfolio.
Those tend to be your typical investment advisor type fees. But make no mistake, there are a bunch of really creative ways you can get paid for investment advice and we can go crazy with this. If I give you really good investment advice and in return you give me your car, that is compensation. So what we're looking for is anything in return and it could be cash or non cash compensation. Anything that is paid to the person providing investment advice, that is compensation 1 even.
Easier way you can try to remember the investment advisor definition is through just remembering ABC. Investment advisors give advice A.
As a regular part of their business, be for compensation, C ABC is an easy way you might be able to remember the definition. Now that we've gone through the legal definition of an investment advisor, let's take a look at a practice question together to see how we might be asked about this definition. OK, question is up on the board, I'll go ahead and read it. An investment advisor can be best described by which of the following definitions.
If you want to go ahead and pause the video, see if you can answer the question yourself and then we'll reconvene here in just a couple seconds and go from there. OK. Hopefully you feel confident with the answer. Let's go ahead and go through all four answers and pick them apart. First one, any person who for compensation.
Engages in the business of advising others on securities. Now this certainly sounds like it could be an investment advisor, right? We have the ABC there, any person who for compensation that's the C engages in the business B of advising A.
Others on securities, we have the ABC of investment advisor here and really there's nothing that I can argue against that certainly sounds like that's our investment advisor there. The first answer is likely our best answer here. But as I always say, go through all four answers and make sure that you have a good enough reason to be able to eliminate the other three that are up here. OK, let's go to the second one.
Any individual who represents a financial firm in affecting or attempting to affect purchases or sales of securities. The first giveaway here that this is not the answer is actually the word individual. Remember, investment advisors are businesses 99% of the time, and The only exception to that might be that sole proprietorship situation, but that is not there in that second answer. And there's also another word I want to point out here. It's the word represents whenever you see the term represents.
Representing, it's almost always in reference to the human being, professionals being agents or investment advisor representatives. That is not what we're talking about here. We're talking about firms with investment advisors. And in fact you may have pointed this out yourself, that second answer there is actually an agent. The individuals that represent broker dealers and do securities transactions, those are agents. That is not an investment advisor. So we'll go ahead and eliminate that second answer, move on to the third, any person.
Person engaged in the business of affecting transactions in securities for the accounts of others or for his own account. If you've already been through the broker dealer section, you should know that that is our textbook legal definition of a broker dealer to me. The part of it that gives it away is they're doing transactions in securities for the accounts of others or for their own account.
And even though it says the word his there we've talked about before, sometimes test questions will make it seem like broker dealers are human beings. But again, broker dealers just like investment advisors, our firms, our businesses. Now something both the 2nd and the 3rd answer here have in common is that we're not talking about investment advice, we're talking about doing securities transactions.
And maybe that's another way you can think of the professionals in way you can kind of split them apart. Broker dealers and agents do securities transactions, investment advisors and IARS give advice on what transactions to do. So that third answer, that's a broker dealer, we'll go ahead and eliminate that one as a wrong answer, the last one.
Any individual who represents a financial firm in offering securities advice, This is an answer that I wouldn't be surprised if a lot of people thought it was the right answer. It is certainly close, right Talk about securities advice offering. It certainly seems like it's a business related activity. But really the big thing that gives it away here again is the word individual investment advisors are firms or businesses. That 4th answer there that is our investment advisor representative and we see two terms there that give.
It away the word individual again and the word represents anytime you see those two words together, we're almost always talking about either an agent or an investment advisor representative. We will talk more about investment advisor representatives as you go further through this material. But for right now we can go ahead and eliminate that as our wrong answer, the first answer choice which meets our definition very clearly, very succinctly. That is our best answer.
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