Under Section 202(a)(11) of the Investment Advisors Act of 1940 (15 U.S.C. § 80b-2(a)(11)), an ‘investment advisor’ 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 who, for compensation and as part of a regular business, issues or promulgates analyzes or reports concerning securities.”
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:
- Up to $25 million
- between $25 million and $30 million
- 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.