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Can You Give Investment Advice (Without Being a Registered Investment Adviser)?

One question that I am often asked is under what circumstances a person can give investment advice, without needing to be a registered investment adviser (RIA). I want to be clear that what follows is only a high level summary of that topic. If this is more than just a curiosity for you, I would encourage you to consult with an attorney with relevant expertise.

Where to Find the Rules

The actual relevant legislation consists primarily of:

And then there are of course various other relevant sources such as regulations, court cases, etc.

What’s an Investment Adviser (“ABCs Test”)

The Investment Advisers Act of 1940 defines an investment adviser 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, or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities.”

The Uniform Securities Act includes a definition that is nearly identical to the above.

People often use the mnemonic device “ABCs” to remember this test. That is, an investment adviser is somebody who is 1) in the business of 2) giving advice 3) about securities 4) for compensation. (Advice, Business, Compensation, Securities.)

And the idea is that you have to meet all of those requirements before you’d need to register as an investment adviser.

So, for example, if you’re a nurse and your daughter comes to you asking how she should invest in the 401(k) at her new job, you are perfectly allowed to give her advice. And there’s no need for a “this is not investment advice” disclaimer. It is advice about securities, but you’re not receiving any compensation, nor does your daughter have any reason to think that you’re “in the business” of providing investment advice for compensation. You don’t meet the ABCs test and thus don’t have to register as an investment adviser.

One important point here is that the SEC and state regulators tend to interpret the above tests as broadly as possible (i.e., to include as many people under the definition as possible). So, for example, any economic benefit received in exchange for the advice would be probably considered “compensation.”

Exclusions

The 1940 Act and Uniform Securities Act also provide exclusions. That is, there are certain people who do meet the above requirements (i.e., they satisfy the ABCs test) but who are nonetheless explicitly excluded from the definition of investment adviser — and thus don’t have to register as investment advisers.

Some of those exclusions include:

  • Any lawyer, accountant, engineer, or teacher whose performance of such services is solely incidental to the practice of his/her profession.
  • Any broker or dealer whose performance of such services is solely incidental to the conduct of his business as a broker or dealer and who receives no special compensation for the investment advice.
  • The publisher of any bona fide newspaper, news magazine or business or financial publication of general and regular circulation.
  • A bank or savings institution.
  • Any person whose advice, analyses, or reports relate to no securities other than securities which are direct obligations of or obligations guaranteed as to principal or interest by the United States.

This is why, for example, somebody can write a blog that discusses all sorts of investment topics, without having to register as an investment adviser. It’s also why somebody can teach a personal finance class — and provide investment advice in that class — without having to register as an investment adviser.

I will note that, as somebody who is a practicing CPA, the exception for accountants is somewhat challenging to apply in real life.

Firstly, what specifically is meant by “the practice of my profession”? That is, what services are considered included in my profession as an accountant, so that we can then try to figure out what would be “incidental” to that profession? At least here in Missouri, public accounting is defined as “services involving the use of accounting or auditing skills, or one or more management advisory or consulting services, or the preparation of tax returns or the furnishing of advice on tax matters.” So basically, accounting includes tax preparation, tax advice, management advisory or consulting services, and “services involving the use of accounting skills” — a pretty circular definition.

And what would be “solely incidental” to that practice? That wording is clearly intended to be vague (i.e., determined on a case-by-case basis, depending on the facts and circumstances). So it’s no surprise that different accountants will draw the line in different places, as far as what degree of investment-related advice they feel comfortable giving.

So, in short, if you meet the “ABCs test” (i.e., you’re in the business of giving advice about securities, in exchange for compensation) when that test is interpreted as broadly as possible (i.e., to include as many people as possible), and you do not fall under one of the explicit exclusions, you probably need to register as an investment adviser. But again, if you’re even remotely unsure about whether something you’re doing (or considering doing) would require you to register as an investment adviser, I’d encourage you to consult with an attorney.

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