Definition of "Investment Adviser"
Before you can understand how investment advisers are regulated, you need to know exactly who qualifies as one. The Uniform Securities Act (USA) uses a specific three-part test to make this determination.
The Statutory Definition
Under the USA, an investment adviser (IA) is 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.
The definition also covers any person who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities.
Importantly, the definition expressly includes financial planners and other persons who provide investment advisory services as part of broader financial services, as well as anyone who holds themselves out as providing investment advisory services for compensation.
The ABC Test
The ABC test is a convenient way to remember the three elements that must ALL be present for a person to be an investment adviser:
| Element | Letter | What It Means |
|---|---|---|
| Advice about securities | A | The person advises on the value of securities or the advisability of investing |
| Business | B | The person is in the business of providing such advice (not a one-time occurrence) |
| Compensation | C | The person receives compensation for the advice |
If ANY one element is missing, the person is NOT an investment adviser under the USA.
- A person who gives securities advice for free (no compensation): NOT an IA
- A person who gives one-time advice to a friend (not in the business): NOT an IA
- A person who gives compensated advice only about real estate, not securities: NOT an IA
Exam Tip: Gotchas
- All three ABC elements must be present. The exam often presents a scenario missing one element (free advice, one-time help, non-securities subject) and asks whether the person is an IA. The answer is no: missing any one of A, B, or C removes the person from the definition.
Compensation: Broadly Interpreted
The compensation element is where most exam traps live. Compensation does not need to be a direct fee charged specifically for investment advice. It includes:
- Direct advisory fees (hourly, flat-fee, or asset-based)
- Commissions on products sold
- Transaction-based fees
- Subscription fees for newsletters or reports
- Any economic benefit received in connection with advisory services
Key points:
- Compensation does not have to be paid directly by the client; third-party compensation counts
- A financial planner who charges a flat fee for a comprehensive plan that includes investment recommendations IS receiving compensation for investment advice
- A person who provides "free" investment advice but earns commissions on products sold IS receiving compensation
Exam Tip: Gotchas
A financial planner who says "I don't charge for investment advice" but earns commissions on product sales IS receiving compensation under Section 401(f). If a person receives ANY economic benefit for providing investment advice (even indirect compensation from a third party), the compensation element is satisfied.
Financial Planners
The 1986 North American Securities Administrators Association (NASAA) amendment explicitly brought financial planners into the IA definition. Here's how this works:
- A person who holds themselves out as providing investment advisory services for compensation is necessarily in the business of doing so; no separate "business" analysis is needed
- Financial planners offering "total financial planning" are holding themselves out as providing investment advisory services and ARE investment advisers
- Financial planners rendering advice exclusively in non-securities areas (e.g., insurance only, budget management only) are NOT covered by the IA definition
The holding-out standard is powerful: if you market yourself as providing investment advisory services, you cannot later claim you're not in the business of advising.