An Investment Advisor (IA) is an individual or firm 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. IAs may be registered with state regulatory agencies or the Securities and Exchange Commission (SEC).
The anti-fraud provisions of the Investment Advisers Act of 1940 and most state laws impose a duty on IAs to act as fiduciaries in dealings with their clients. This means the IA must hold the client's interest above its own in all matters. The SEC has said that an IA has a duty to:
- Make reasonable investment recommendations independent of outside influences.
- Select broker-dealers based on their ability to provide the best execution of trades for accounts where the adviser has authority to select the broker-dealer.
- Make recommendations based on a reasonable inquiry into a client's investment objectives, financial situation and other factors.
The Employee Retirement Income Security Act of 1974 (ERISA) requires each entity providing investment advisory or custodian services to investors to maintain coverage according to established limits.
The intent of coverage is to protect ERISA investments from dishonest acts, including acts of fraud and embezzlement committed by outside investment advisors. This coverage is written on the Commercial Crime Policy form, and provides coverage for employee dishonesty and dishonest acts of designated agents providing investment advisory services.
Great American’s Fiduciary Dishonesty Policy provides IAs with the coverage limits required by ERISA and subsequent addendums.