What Is an “Investment Adviser?”

Investment advisers manage hundreds of billions of dollars for individuals, trusts and estates, corporate retirement plans, endowments and foundations. Due to a number of factors, it is likely that their role in securities markets will continue to grow.

These circumstances, together with our own role as an investment adviser, bring up a natural topic for discussion in this issue of Commentary: What is an “investment adviser?”

The Investment Advisers Act of 1940 is the statute that recognized and provided for the regulation of investment advisers. That legislation defines investment advisers as “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…”

McRae Capital Management, like other investment advisers recognized under the 1940 act, is registered with the Securities and Exchange Commission (S.E.C.). Such registered advisers make regular filings with the S.E.C. and are always subject to government examination.

Individuals, corporations and tax-free funds wanting professional management of their assets often turn to investment advisers. The size of an investment counseling firm may range from one person to several hundred people.

The common factor uniting all of them is the independence of their investment decisions. McRae, and firms like us, do not sell or promote one investment over another. Thus, we are able to render professional and continuous advice to clients free of bias or conflict of interest.

Private Foundations Financial Planning image for family business investment advisers McRae Capital Management.

Primary Functions

An investment adviser has two primary functions: first, to take a specific sum of money (usually an amount that is set aside above and beyond that needed to provide for one’s day-to-day financial needs) and preserve it; second, to make that money grow. The minimum amount that is accepted depends on the firm, but few firms today accept less than $200,000.

The majority of investment advisers invest the funds in stocks and bonds. The balance between the two is chosen according to what the client wants to achieve from the investment of the money. There are, of course, varying degrees of stock and bond combinations. Some people wish to have the initial amount preserved for the future but want to receive income from the investments to use for present needs; others wish to have the funds simply grow, reinvesting the income as they go along to add to the compounded growth of the initial investment.

The adviser chosen to accomplish this task should have a philosophy that is compatible with that of the client so the client can feel comfortable with the buy/sell decisions, which are made on a discretionary basis. (“Discretionary” in the financial lexicon is used to mean decisions made “at the discretion” of the adviser without specific prior consultation with the client on each decision, but consistent with agreed upon objectives.)

All securities are held in the client’s name at a bank or in an insured custodian account at a brokerage firm. Quarterly reports of the account are sent to the client with a gain and loss statement included at year-end for use in tax return preparation. An investment adviser works with the client’s accountant addressing individual or corporate tax issues where indicated.

An investment adviser has regular meetings with clients, as well as being available on a daily basis to discuss client questions or concerns via telephone.


Investment Advisers: What We Are Not

What we are not further defines investment advisers. We are not a broker; we don’t trade securities nor do we receive commission income. We are not a bank trust department; we don’t keep clients’ assets, and we don’t act as a trustee.

National surveys reveal that the principal sources of investment guidance for most (individuals, at least) are the news media and friends and associates. However, as the assets to be invested increase in size, there is less inclination to trust intuitive Systems and more desire for professional management. Certainly, this has always been true for institutions: pension plans, corporate portfolios and non-profit organizations. Increasingly, it is the case for individuals, who through lump-sum distributions, inheritance or the sale of a substantial asset, find themselves with considerable funds to be 1) protected; and 2) nurtured and increased.

We are not a broker; we don’t trade securities nor do we receive commission income. We are not a bank trust department; we don’t keep clients’ assets, and we don’t act as a trustee.

business meeting

An Expanding Role

This returns us to an earlier point: why is the use of independent investment advisers on the rise?

First there is today’s complex and rapidly changing investment environment to be considered. There are thousands of stocks, bonds and mutual funds from which to choose. Recession, inflation, deflation cloud the economic landscape. Government regulations and taxes compound the situation. In this scenario, most investors need help.

Second, although unsure of what to do, most investors want more from their investments. Today, total return (income plus appreciation) is the most critical aspect of asset management. When inflation was not a concern, investment decisions could be based on easily quantified dividend yields. Growth and the maintenance of purchasing power are much more elusive.

Third, institutions have become the dominant force in the market today. As a result, fewer and fewer investors choose to “go it alone.” Most feel they are on a more equal footing when professionally advised.

Finally, there are practical considerations such as time, convenience, ease of investing and peace of mind. When hiring an investment adviser, your likelihood of success often hinges on compatibility. You and your adviser should share similar styles, philosophies and preferences. It would make little sense, for instance, for an aggressive investor with a “trading” orientation to team with an adviser who seeks more moderate, but more consistent performance.

How are investment advisers paid? As mentioned, usually it’s a fee that is a percentage of the assets under management. Advisers are not transaction oriented. The only way for their income to go up is to increase the assets under management. To that extent, the investor and the adviser share the exact same objective.

How do investment advisers operate? Mutual funds and bank common funds force the client to accept the character of their fund. Others, such as McRae Capital Management, tailor their recommendations to meet the objectives and preferences of their clients.

It should be pointed out that basic portfolio allocation decisions are usually more important than the selection of individual issues. Often, investors believe that the value of an investment adviser comes from the selection of specific issues and the timing of buy/sell decisions. To an extent, this is true. However, even more fundamental is the initial allocation of a portfolio between stocks, bonds and cash… followed by subsequent re-allocations of the portfolio between these major investment categories. Re-allocations are made as market and economic conditions change, or in the event of a change in a client’s investment objective. Thus, the investor’s portfolio stays responsive to current opportunities and needs, as well as anticipated changes.

McRae Capital can help you understand a host of topics, like the risks of market volatility, how to live off retirement savings, and why taking the long view as an investor is so very important. Please read our other Commentaries, and do not hesitate to call us with any questions.

Connect your finances to what matters most

This article can provide only a general understanding of sometimes difficult financial concepts. For for a more thorough explanation, or if you have questions about your own portfolio, please feel free to reach out to us here at McRae at (973) 387-1080.