877-218-1776 
Since it is not always clear if a professional meets the definition of “investment adviser,” the SEC issued a release in 1987 that attempts to explain their thought process when determining if someone is or is not an investment adviser. This release made clear that the “three-pronged” test to determine if someone is an investment adviser involves the following:
• Does the professional provide investment advice?
• Is he/she in the business of providing advice?
• Do they receive compensation for this advice?
If the answer to all three questions is “yes,” the person is an investment adviser and must register unless they can claim an exemption.
So, first, does the professional provide investment advice? This is the most difficult of the three prongs to determine. Generally, if someone helps someone decide whether to invest in securities based on the client’s needs, that person is providing investment advice. The specificity of the advice is not a determining factor. For example, if a sports agent helps clients pick investments in securities in general as an alternative to an investment in real estate or insurance-based products, then that professional is acting as an investment adviser.
In fact, if they tell clients to avoid investing in securities/to invest elsewhere, they are acting as investment advisers.
Pension consultants who help pension plans decide either which securities to invest in or whether to invest in securities over some other asset are investment advisers. The consultants who help the funds determine which investment advisers to hire or retain are as well.
What does it mean to “be in the business of providing advice”? The SEC and NASAA determined that a person is in the business of providing advice if he or she gives advice on a regular basis and that advice, “constitutes a business activity conducted with some regularity.” The frequency is a factor, but not the only factor in determining if the person is “in the business” or not.
In other words, the regulators take it case-by-case.
Providing advice does not have to be the main activity of the person, either. The person could be a CPA doing tax planning work and only providing investment advice if a client asks for it. That is close enough. If the person “holds himself out to the public” as one who provides investment advice—via business cards, billboards, letterhead, office signage, etc.—then he is in the business and is considered to be an investment adviser.
What about the compensation question, the third prong? Some would like to think they are not advisers because they do not receive money for their advice. But regulators use the broader term “compensation” to determine who is and is not an investment adviser. Compensation is any economic benefit, not necessarily money.
Even if someone other than the client pays the compensation, the person is an investment adviser. For example, if a firm advises Coca-Cola’s employees on how to allocate their 401(k) investment dollars, and bills the company, they meet the definition of an investment adviser.
Some securities agents with a Series 6 or 7 function as financial planners, even if they do not call themselves that. Many of these planners assume they can put together a financial plan for free and only get paid off any resulting commissions to avoid being defined as investment advisers.
Unfortunately, Release IA-1092 says they would likely be considered investment advisers because they receive an economic benefit because of their advice. The compensation might come directly or indirectly as the result of providing investment advice to clients. However it comes, the regulators will probably require such people to get registered.
It does not matter whether the compensation is called a “commission” or a “fee.” The compensation does not have to be listed as a separate item. The regulators, as always, look at how things function. If it were based on terminology, those who wanted to escape registration could just use different terms and function in a way that threatens investors.