Updated Jun. 24, 2020
The SEC’s Office of Investor Education and Advocacy is issuing this Investor Bulletin to provide tips on what to consider when opening an investment advisory account. Investment advisory accounts differ from brokerage accounts, which generally are governed by different rules and regulations. For information on opening a brokerage account, please see our bulletin: How to Open a Brokerage Account.
Before opening an account with any financial professional, you should always remember to check the individual or entity’s background and disciplinary history. You can do this using the free and simple search tool found at Investor.gov.
Information to Discuss with a Potential Investment Adviser
Investment advisers offer a wide range of products and services, including financial planning, portfolio management or even advice concerning the selection of other investment advisers. It is important to be sure an investment adviser can offer the services that are right for you. You should be prepared to discuss what you are looking to get out of your investment advisory account with a potential investment adviser, and any adviser you are considering should be willing to have that conversation with you.
- Your investment goals—What do you want to save or invest for? Are you looking to have income each month, or to save up for a large purchase?
- Your investment timeline—When do you anticipate needing the money?
- Your investment size—How much you want to invest? And do you want advice regarding all of your finances—even assets that you are not looking to invest?
- Your risk tolerance—How much risk you are comfortable taking? Would you be comfortable losing some or all of your money in exchange for potentially higher returns?
- Your desired level of service—Are you comfortable giving someone else the authority to make investment decisions for your account? How often do you want to discuss your account with your adviser? Meet in person with him or her? How much ongoing monitoring of your investments do you expect? How frequently would you expect trades to occur? Would advice be delivered through an individual person, or would some advice be through automated or online services (sometimes called robo-advice)?
- Your costs—What fees are associated with the account? And how does that compare to what you are paying or have paid in the past? Do the fees make sense, given your situation and what you are looking for?
You may also want to ask general questions, like what type of clients the adviser typically provides advice to, and whether they tend to invest clients’ money in a certain type of product. If you are unsure why the products and services being offered make sense for someone like you, ask the adviser to explain.
Understand Your Advisory Contract
Before opening an investment advisory account, you should understand what is covered by your agreement with the investment adviser. Most advisers will ask you to sign a written advisory contract. You should read the advisory contract and any other disclosure documents and be sure you understand important information like:
- Types and frequency of services provided
- Types of products offered
- How fees are calculated
- Your responsibilities under the contract
- How to contact your adviser, including specific requirements like putting certain communications in writing
- How to cancel the contract
- The conflicts of interest the adviser has with you and how those conflicts may be managed
- What your remedies are if you are unhappy with the service you are provided
Understand Your Fees
You will pay a variety of fees in connection with your investment advisory account. The types of fees and their amounts will vary among investment advisers. Before opening an account, make sure you understand what fees will apply. This includes fees that are paid to your adviser directly or indirectly, and also other fees that are paid to third-party service providers instead of your adviser.
Advisers commonly earn money through client fees, commissions, or a combination of the two.
- Client fees may include an hourly, fixed or flat fee based on the time an adviser spends providing you with advice or on specific transactions in your account, like buying or selling securities. Client fees may also be based on the value of assets in your account. These “asset-based fees” might be ongoing, whether there are transactions in your account or not.
- Commissions are based on certain transactions in your account—for example, purchasing a particular security.
In addition to paying your adviser, you will likely pay ongoing fees in connection with purchasing and owning certain investments, like mutual funds, ETFs and variable annuities. Understanding the types and total amount of fees you might be charged is particularly important — even small ongoing fees can have a significant impact on your return on your investments over time. For additional information on fees associated with investment products and services, please read Updated Investor Bulletin: How Fees and Expenses Affect Your Investment Portfolio.
Your adviser will provide you with a brochure containing important information about its advisory business before or at the time you enter into an advisory agreement. The brochure is required to include information about how the adviser is compensated for its advisory services, its fee schedule, whether the fees are negotiable and the conflicts of interest the adviser may have.
Your adviser will also provide you with a “relationship summary.” The relationship summary includes information about the types of services the adviser offers, the fees and costs you will have to pay for those services, the conflicts of interest the adviser may have, the required standard of conduct, any legal and disciplinary history and questions to ask the adviser.
Questions You Should Ask Before Opening an Investment Advisory Account
- Given my financial situation should I choose an investment advisory service?
- What services will I receive with this investment advisory account? How frequently will I receive these services?
- Help me understand how fees and costs might affect my investments. If I give you $10,000 to invest, how much will go to fees and costs, and how much will be invested for me?” How do the fees compare to what I am paying now?
- Who will make investment recommendations and/or decisions for my account? What is their relevant experience, including their licenses, education and other qualifications? What do these qualifications mean?”
- How will you choose investments to recommend to me?
- What choices do I have regarding investments?
- How can I access funds in my account and how much time does that take?
- How will I receive my account statements? Will they be online or in paper?
- Who is my primary contact person? Who can I talk to if I have concerns about how this person is treating me?
- How regularly will you review my account?
- How might your conflicts of interest affect me, and how will you address them?
- Do you or any of your financial professionals have any disciplinary history? For what type of conduct?
For additional investor education information, see the SEC’s website for individual investors, Investor.gov.