Investment Adviser FAQs

Palm Beach Securities Attorney Russell Forkey

Over the years, I have found that while investors have heard of registered investment advisers, most clients do not understand what agency, if any, oversees investment advisers, what type of work investment advisers can perform for you, how they are paid and what a client’s rights are if the investment adviser breaches its obligation to the client. To find the answers to some of these questions, please read below. Significantly, I have highlighted a paragraph below, which in my opinion, is the most critical contractual provision to beware of in an agreement with an investment adviser. However, you have to read on to see what it is.

The purpose of this post is to provide the reader with general educational information about registered investment advisers and what they do. Please keep in mind that any information contained herein should not be considered as legal or investment advice. You should consult an experienced professional, if you have any questions concerning anything that you read on this page.

Through my years of practice, I have represented clients in various claims against registered investment advisers for such things as fraud in the inducement of the investment advisory relationship, fraud, misrepresentation and breach of contract in the advisory firm’s performance of either its agreed or implied responsibilities to the client. This post relates only to those registered investment advisers that are required to be licensed with the Securities and Exchange Commission and does not discuss state-registered investment advisors.

What is an Investment Adviser?

Investment advisers are in the business of giving either advice about securities to a client or managing a client’s investment portfolio for compensation. Section 203 of the Investment Advisers Act of 1940 provides that “except as provided in sub-section b and Section 203A, it shall be unlawful for any investment adviser, unless registered under this section, to make use of the mails or any means or instrumentality of interstate commerce in connection with his or its business as an investment adviser.”

In order to become licensed as an investment adviser, it is necessary for the firm or individual to submit an application to the Securities and Exchange Commission, which is called an ADV form, which stands for Uniform Application for Investment Adviser Registration. Once an individual or firm becomes licensed as an investment advisor, there are numerous requirements that it must satisfy, which include such things as record-keeping, the substantive content of adviser contracts, advertising, the custody of client funds and assets, and various matters relating to portfolio management.

What is an ADV Form?

If you are contemplating retaining a Registered Investment Adviser, it is a good idea for you to review, in advance of even making a call for an appointment, the adviser’s current ADV form, which can be obtained online by visiting the SEC Investment Advisor Public Disclosure website.

These ADV filings are a wealth of information concerning, the adviser and certain individuals affiliated with it. For example, it includes disclosures about:

  • The form of the organization
  • The number and type of employees
  • Types of clients
  • Compensation agreements
  • Assets under management
  • Advisory activities
  • Other business activities
  • Financial industry affiliations
  • Whether the firm has investment or brokerage discretion
  • Whether the firm has custody of client assets
  • A section relating to disciplinary history, ownership
  • Criminal and civil litigation history
  • Matters that might create a conflict of interest between the firm and the client
  • Numerous other disclosures

As far as compensation of the adviser is concerned, it has various choices from which it can elect to charge its clients which have to be disclosed in its current ADV filing. By reviewing this in advance, you don’t go into the initial meeting blind on this issue.

The Investment Advisory Agreement:

If you elect to establish a relationship with an investment adviser, you will be asked to sign an agreement setting forth the parameters of your relationship with the adviser. This is the “key” document between you and the adviser. This agreement might relate to such things as:

  • Whether the investment adviser will manage your account at another firm or an affiliated broker-dealer
  • The type of investment strategy that will be followed
  • Various risks associated with the strategy
  • There is no guarantee that the client’s investment goals will be met
  • The agreement will allow the adviser to take his fees directly out of the client’s funds
  • The effect that trading may have on tax considerations
  • The fact that the adviser may take positions inconsistent with the client
  • Other items too numerous to discuss

Review the agreement to see where any disputes that you might later have with the investment adviser must be resolved. Some agreements require that disputes be filed in specific courts, in a predesignated location such as Broward County, Florida. Obviously, the further you live from this location the more difficult it becomes for you to find local counsel and to participate yourself in all aspects of the case. If this bothers you, you may want to look at retaining another firm that does not have such a provision in its agreement. Obviously, no one enters into a business relationship with the preconceived goal of suing the other party, but it helps to plan ahead. Notwithstanding the foregoing, some agreements contain a predispute arbitration clause that again requires you to arbitrate the dispute in a predesignated location and through a specific arbitration forum.

Regardless of the information contained in the preceding paragraph, most disputes with registered investment advisers, unless they are also registered broker-dealers, are resolved in court proceedings. As any reader knows, court proceedings are much more costly than arbitrations and usually take longer. An attorney who is qualified to handle an arbitration matter may not be qualified to represent you in a jury or not jury trial.

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