We just learned about investment advisers, which are businesses that offer investment advice on a regular basis in return for some form of compensation. The natural persons (human beings) that work for investment advisers are referred to as investment adviser representatives (IARs). Let’s take a look at the legal definition of an IAR:
That’s a lot! Let’s break the entire definition down to better understand the roles and responsibilities of an IAR.
Partners, officers, and directors are high-level employees in business organizations. The point of establishing these roles in the definition of an IAR is to regulate the executive-level employees, even if they’re not actively providing investment advice themselves. For example, Mary Callahan Erdoes, who is the CEO (Chief Executive Officer) of JP Morgan Asset Management, likely does not create or provide investment advice as a part of her role. CEOs are essentially the “top boss” within a company, and are in charge of the organization’s overall success. Regardless, she is registered as an IAR of the investment adviser that employs her (JP Morgan Asset Management).
Next, the legal definition includes any other individual employed by a registered investment adviser or federal-covered adviser. For now, you’ll need to assume investment advisers (firms, not the IARs) will be state-registered and regulated, or federally registered and regulated (a.k.a. federal-covered). The rules and regulations of the Uniform Securities Act (USA) apply to state-registered advisers, and the rules and regulations of the Investment Advisers Act of 1940 apply to federal-covered advisers. For purposes of the exam, you’ll need to know why an investment adviser firm would be considered state-registered or federal-covered (covered later) and be aware of the existence of the Investment Advisers Act of 1940. However, the Series 63 does not focus much on federal rules and regulations. Remember, this is a state-based exam!
Regardless of the type of investment adviser an IAR works for, IARs are always registered solely with the state. There is no such thing as a federal-covered IAR. Regardless, protocols and rules are sometimes different for IARs of state-registered advisers than IARs of federal-covered advisers. We’ll cover these differences in depth later in the Achievable materials.
The general roles that require employees to register as IARs are detailed at the end of the legal definition of an IAR:
Let’s break down each of these:
Makes any recommendations or otherwise renders advice regarding securities
This one should be fairly self-explanatory. Most registered IARs provide some form of investment advice on securities as a part of their job. Investment advice could be as simple as recommending a single security for purchase or sale, or as far as creating a holistic financial plan for a client.
Manages accounts or portfolios of clients
IARs can provide touch-and-go guidance to their clients, or they can take a more proactive approach. Investors that don’t have the time, patience, or knowledge necessary to invest their money often hire professionals to do it for them. In many cases, management of a client’s portfolio is performed in discretionary accounts, which allows IARs to make investment decisions on behalf of their clients without their explicit approval before each trade. Of course, a power of attorney (a document that provides legal authority to a third party to act on behalf of another individual) must be obtained.
Determines which recommendation or advice regarding securities should be given
It’s not uncommon for investment adviser firms to create and distribute “recommendable” securities lists to their IARs. These lists can be short and concise or large and broad. Most of the time, very aggressive investments are not included on these lists. This system prevents IARs from recommending securities with significant risk potential (e.g. penny stocks) to their clients. Investment advisers and IARs must always operate in a fiduciary capacity, and can be held legally liable for exposing their investors to too much risk. Fiduciaries must put their client’s interests before their own and always act in their best interest.
Investment adviser employees in charge of creating recommendation protocols or lists for other IARs will also be required to register as an IAR, even if they aren’t providing advice to clients themselves.
Solicits, offers, or negotiates for the sale of or sells investment advisory services
Financial firms can offer a wide range of products and services to their customers. Items like trading platforms and research tools are considered brokerage (broker-dealer) services. Employees of broker-dealers must be registered as agents to offer or sell these products. Items like financial plans and wrap accounts are considered investment advisory services. Employees that sell (or attempt to sell) these products to customers must be regulated and properly registered as IARs.
Supervises employees who perform any of the foregoing
Going back to the beginning of this section, leaders in an investment adviser are also required to be regulated and registered as IARs if supervising or managing other IARs.
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