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June 14, 2024


Last updated: June 29, 2024

Mastering The Role Of The Investment Adviser

By: Securities Institute Staff

Mastering The Role Of The Investment Adviser On The Series 66 Exam
The Uniform Combined State Law Examination

One of the keys to passing the Series 66 exam is to make sure that you have a complete understanding of how investment recommendations will be tested on the Series 66 Exam. This article which was produced from material contained in our Series 66 textbook and will help you master the material so that you pass the Series 66 exam.

The Role of the Investment Adviser

An investment adviser charges a fee for his or her services for advising clients as to the value of securities or for making recommendations as to which securities should be purchased or sold. Unlike a broker dealer, the investment adviser has a contractual relationship with his or her clients and must always adhere to the highest standards of professional conduct.

Additional Compensation for an Investment Adviser

In addition to the fees charged by an investment adviser, an investment adviser may also:

  • Receive commissions for executing a customer’s transaction through certain broker dealers
  • Act as a principal in a customer’s transaction

The above sources of additional revenue must be disclosed to the client in writing prior to the investment adviser executing such transactions.

Agency Cross Transactions

An agency cross transaction is one in which the investment adviser represents both the purchasing and selling security holder and receives advisory fees and commissions from both parties. If the investment adviser is going to execute an agency cross transaction, they must get the advisory client’s authorization in writing. The authorization may be pulled at any time verbally and the adviser may not have solicited both sides of the trade. Advisers who execute agency cross transactions must send clients an annual report detailing the number of agency cross transactions executed by the adviser and the amount of commission received by the adviser.

Disclosures by an Investment Adviser

An investment adviser must disclose all of the following:

  • Conflicts of interest
  • Sources of recommendations
  • Location of customer’s funds for advisers with custody
  • Any legal actions taken against the adviser
  • Material facts
  • The use of third party research to make recommendations

An investment adviser may not:

  • Borrow from a customer
  • Commingle customer’s funds with the adviser’s funds
  • Accept an order from a party not named on the account of the customer
  • Churn customer accounts
  • Make unsuitable recommendations
  • Charge unreasonable fees

An investment adviser with custody of customer’s funds must:

  • Segregate all customer funds and securities
  • Give the customer a written notice of the location of the funds
  • Establish a separate bank account for the customer’s funds
  • Provide quarterly statements showing all transactions and account status
  • Go through an annual surprise audit


The state securities administrator may or may not allow advisers to have custody of clients’ funds. If custody is allowed, the adviser must notify the state that they have custody and adhere to all requirements relating to custody of client funds.

Investment Adviser Contracts

All investment adviser contracts must be in writing and must contain disclosures of:

  • Length
  • Services to be provided
  • Fees to be charged and how they are assessed
  • The amount of any prepaid fees to be returned upon cancellation of the contract
  • A statement prohibiting the investment adviser from assigning the contract without the customer’s consent
  • A notification of any changes in the adviser’s management
  • Limits on the adviser’s discretionary authority over the customer’s account, if any


If an investment adviser uses an outside solicitor to refer business, such as an accounting firm, the client must get both the advisory’s brochure and the solicitor disclosure document or solicitor’s brochure.

Additional Roles of Investment Advisers

As the business services offered by various professionals have expanded, so has the definition of who must register as an investment adviser. Sports and entertainment representatives now often advise their clients on how or with whom to invest their earnings. As a result, the representative is considered an investment adviser, even if investment advice is only a small part of the services they perform. Individuals who advise pension funds on the merits of portfolio managers or who act as pension consultants must also register as investment advisers.

Private Investment Companies/ Hedge Funds

A private investment company or 3 C7 hedge funds may charge performance-based compensation to clients, provided that the clients have a minimum of $1,000,000 of assets under the adviser’s management or have a net worth of $2,000,000. Corporations with $25 million in assets and individuals with at least $5 million in investments may also participate.

Fulcrum Fees

Advisers who manage accounts for investment companies or accounts with a value greater than $1 million, if those accounts are not for trusts or retirement plans, may charge fulcrum fees. A fulcrum fee provides the adviser with additional compensation for outperforming a broad-based index such as the S & P 500 and less compensation for under performing the index. The amount of the additional compensation received for outperforming the index must be equal to the amount of compensation that would be lost for underperformance. The index used as the basis to determine the adviser’s performance must contain similar securities and risks.

Wrap Accounts

A wrap account is an account that charges one fee for both the advice received as well as the cost of the transaction. All clients who open wrap accounts must be given the wrap account brochure that will provide all of the information that is found on Form ADV part II.

Soft Dollars

Brokerage firms will oftentimes provide investment advisers with services to assist the investment adviser in their business that go beyond execution and research. These services are provided in exchange for commission business and are known as soft dollars. The services received should normally be research related. However there are instances when the services received are used for other purposes. Investment advisers must ensure that the services received are for the benefit of the client and need to pay careful attention to the disclosure requirements relating to soft dollars. The SEC has divided soft dollar consideration into the following categories:

  • Goods/Services
  • Accounting Fees
  • Association Membership Fees
  • Cable Television
  • Commission Rebates
  • Computer Hardware
  • Computer Software
  • Conferences/Seminars
  • Consulting Services
  • Courier/Postage/Express Mail
  • Custodial Fees
  • Electronic Databases
  • Employee Salary/Benefits
  • Execution Assistance
  • Industry Publications
  • Legal Fees
  • Management Fees
  • Miscellaneous Expenses
  • Office Equipment/Supplies
  • On-line Quotation and News Services
  • Portfolio Management Software
  • Rent
  • Research/Analysis Reports
  • Telephone Expenses
  • Travel Expenses
  • Tuition/Training Costs
  • Utilities Expenses