A state-registered investment adviser (IA) has decided to offer a new service where clients can pay a subscription fee for access to a proprietary trading algorithm and automated portfolio rebalancing. The IA will not have discretionary authority over client accounts; clients will manually approve all trades generated by the algorithm. Under the Uniform Securities Act (USA), this new service offering:
- ADoes not constitute investment advice, as clients retain final approval.
- BStill falls under the definition of investment advisory services.
- CRequires the IA to register as a broker-dealer.
- DIs exempt from registration if the subscription fee is less than $500 per year.
Show answer & explanationAnswer & explanation
Correct answer: B. Still falls under the definition of investment advisory services.
Providing specific recommendations (even if automated) and advice on portfolio rebalancing for compensation, even without discretionary authority, still constitutes providing investment advisory services. The definition of an investment adviser includes anyone who, for compensation, engages in the business of advising others as to the value of securities or the advisability of investing in, purchasing, or selling securities.
Why the other options are wrong
- A. Providing a trading algorithm and rebalancing advice is still considered investment advice, even if the client has final approval, as the IA is guiding their investment decisions.
- C. Providing advice, even through an algorithm, does not necessarily mean the IA is acting as a broker-dealer, which involves effecting transactions.
- D. There is no such de minimis exemption for the amount of the subscription fee for an IA's services under the USA.
Definition of Investment Adviser (USA)
An Investment Adviser (IA) is any person who, for compensation, engages in the business of advising others as to the value of securities or the advisability of investing in, purchasing, or selling securities.
- Compensation can be explicit fees or implicit benefits.
- Advising includes direct recommendations, asset allocation, and even automated algorithms.
- Discretionary authority is not required for a firm to be considered an IA.
Memory trick: Advising, Business, Compensation = IA 'Triple Threat'.