Investment adviser representatives (IARs)

We just learned about investment advisers, which are businesses that provide investment advice on a regular basis in exchange for compensation. The natural persons (human beings) who work for investment advisers are called investment adviser representatives (IARs). Here’s the legal definition of an IAR:

That’s a dense definition, so it helps to unpack it into two parts:

• Who can be an IAR (which people at the firm are included)
• What activities make someone an IAR (the job functions that trigger IAR status)

Who can be an IAR

Partners, officers, and directors

Partners, officers, and directors are high-level employees in business organizations. Including these roles in the definition ensures that executive-level employees are regulated, even if they aren’t personally giving day-to-day investment advice.

For example, Mary Callahan Erdoes, the CEO (Chief Executive Officer) of JP Morgan Asset Management, likely doesn’t create or deliver specific investment recommendations as part of her daily responsibilities. A CEO is essentially the “top boss” and is responsible for the organization’s overall direction and success. Even so, she is registered as an IAR of the investment adviser that employs her (JP Morgan Asset Management).

Other individuals employed by or associated with an adviser

The definition also covers any other individual employed by or associated with:

• A state-registered investment adviser, or
• A federal-covered adviser (a federally registered adviser)

For now, assume that investment adviser firms (not the IARs) fall into one of these two categories:

• State-registered advisers are regulated under the Uniform Securities Act (USA)
• Federal-covered advisers are regulated under the Investment Advisers Act of 1940

For exam purposes, you’ll need to know why an investment adviser firm would be state-registered or federal-covered (covered later). We’ll build on both sets of rules as we move through this unit.

Where IARs register

Regardless of whether an IAR works for a state-registered adviser or a federal-covered adviser, IARs are always registered at the state level. There is no such thing as a federally covered IAR.

Even though IARs register with the state in both cases, some rules and procedures can differ depending on whether the firm is state-registered or federal-covered. Those differences are covered later in the Achievable materials.

What activities make someone an IAR

The definition lists five activities that generally require registration as an IAR:

1. Makes any recommendations or otherwise renders advice regarding securities
2. Manages accounts or portfolios of clients
3. Determines which recommendation or advice regarding securities should be given
4. Solicits, offers, or negotiates for the sale of or sells investment advisory services
5. Supervises employees who perform any of the foregoing

Let’s break down each one.

Makes any recommendations or otherwise renders advice regarding securities
This is the most straightforward category. Many IARs provide investment advice as part of their job. That advice might be as simple as recommending one security to buy or sell, or as broad as building a complete financial plan.

Manages accounts or portfolios of clients
Some IARs provide occasional guidance, while others actively manage client portfolios. Investors who don’t have the time, patience, or knowledge to manage their own investments often hire professionals to do it.

In many cases, portfolio management happens through discretionary accounts, which allow an IAR to make investment decisions for the client without getting explicit approval before each trade. To do this, the adviser must obtain a power of attorney, a document that gives legal authority to a third party to act on another person’s behalf.

Determines which recommendation or advice regarding securities should be given
Many investment adviser firms create internal lists of securities that their IARs are allowed (or encouraged) to recommend. These lists may be short or extensive, but they often exclude very aggressive or highly speculative investments.

This approach helps limit recommendations of securities with significant risk potential (for example, penny stocks). Investment advisers and IARs must operate in a fiduciary capacity and can be held legally liable for exposing clients to inappropriate levels of risk. A fiduciary must put the client’s interests ahead of their own and act in the client’s best interest.

Because these internal lists and protocols shape what advice clients receive, employees who create or control them must register as IARs - even if they don’t personally meet with clients.

Solicits, offers or negotiates for the sale of or sells investment advisory services
Financial firms may offer both brokerage services and advisory services.

• Brokerage services (through a broker-dealer) include things like trading platforms and research tools. Employees who sell brokerage products must be registered as agents.
• Advisory services include things like financial plans and wrap accounts. Employees who sell (or attempt to sell) advisory services must be registered as IARs.

Supervises employees who perform any of the foregoing
Supervision also triggers IAR status. Leaders and managers at an investment adviser must be registered as IARs if they supervise employees who perform any of the activities listed above.