In almost every case, yes — you need a license to invest other people’s money. Which license depends on what you actually do for them. If you give personalized advice about securities for compensation, you must register as an investment adviser. If you execute trades on their behalf, you must register as a broker-dealer representative. Both paths involve qualifying exams, registration with federal or state regulators, and ongoing oversight, and skipping the process exposes you to fines, industry bars, and potential prison time.
When the Law Treats You as an Investment Adviser
The Investment Advisers Act of 1940 uses what the industry calls the ABC test. You are an investment adviser if you provide Advice about securities, do so as part of a Business rather than as a one-off favor, and receive Compensation for it.1Office of the Law Revision Counsel. 15 USC 80b-2 – Definitions Compensation is read broadly. Advisory fees count. So do commissions, performance-based pay, and indirect economic benefits like referrals given in exchange for advice.
If all three elements apply, registration is not optional. And once you are registered, you owe your clients a fiduciary duty: you must act in their best interest, disclose conflicts of interest, and make sure your recommendations fit their situation. That standard is enforceable, not aspirational.
Adviser or Broker-Dealer: Which License Fits Which Activity
The two roles look similar from the outside but sit under different rules.
An investment adviser gives ongoing advice about securities and manages portfolios. A broker-dealer representative — the traditional stockbroker — primarily executes securities transactions: buying and selling stocks, bonds, and mutual funds for clients. Both the individuals and their firms register with the SEC, and broker-dealers must also be members of FINRA, the Financial Industry Regulatory Authority.2FINRA. What It Means to Be Regulated by FINRA
Broker-dealers now operate under the SEC’s Regulation Best Interest, which took effect in June 2020. Reg BI requires them to act in the best interest of retail customers when making a recommendation and to disclose conflicts of interest.3Legal Information Institute. Regulation Best Interest (Reg BI) The obligation attaches at the moment of a recommendation rather than continuously across the relationship, which is a narrower duty than the fiduciary standard an adviser carries.
If you plan to do both — give advice and execute trades — you need both registrations.
Where You Register: SEC or State
Investment advisers register at either the federal or state level, and the dividing line is assets under management. Advisers with $100 million or more in AUM generally register with the SEC. Below that, they register with their home state’s securities regulator. A buffer between $90 million and $110 million keeps advisers from bouncing between regulators every time AUM fluctuates.4U.S. Securities and Exchange Commission. Remarks to the Annual Conference on Federal and State Securities Regulation
Some advisers must register with the SEC regardless of AUM, including advisers to registered investment companies like mutual funds and ETFs, advisers required to register in 15 or more states, and certain internet-based advisers. In the other direction, an adviser whose clients all live in the adviser’s home state and who does not advise on nationally listed securities may be exempt from federal registration.5Office of the Law Revision Counsel. 15 USC 80b-3 – Registration of Investment Advisers
Every registered adviser files Form ADV, a public disclosure document. Part 2A — the brochure — must be delivered to each client before or at the time they sign the advisory agreement, and it must lay out your fees, billing practices, conflicts of interest, and disciplinary history.6eCFR. 17 CFR 275.204-3 – Delivery of Brochures and Brochure Supplements
Exams You Have to Pass
The exams depend on the role.
To become an investment adviser representative, the most direct route is the Series 65 (Uniform Investment Adviser Law Examination), which costs $187 and covers portfolio management, economic factors, and ethics.7NASAA. Exam FAQs Passing it lets you register as an IAR with your state. Alternatively, combining the Series 7 with the Series 66 covers both state securities law and adviser topics.
Some professional designations can waive the Series 65 in states that have adopted the NASAA model rule: the CFP, CFA, ChFC, PFS, and CIMA. Whether the waiver applies where you live is a question for your state securities regulator.
To become a broker-dealer representative, you take the Series 7 (General Securities Representative Examination), which costs $395, after passing the Securities Industry Essentials (SIE) exam as a prerequisite.8FINRA. Series 7 – General Securities Representative Exam If you want to work as both a broker-dealer representative and an investment adviser representative, adding the Series 66 ($177) alongside the Series 7 covers both roles.9NASAA. Series 66 Exam Content Outline
After passing, you register formally through the appropriate regulatory system. Background checks, fingerprinting, and disclosures about employment history, disciplinary record, and financial condition all come with the process. You cannot legally conduct business until that registration is approved.
The Narrow Exemptions
Real exemptions exist. They are narrower than most people assume, and it is worth knowing the boundaries before relying on one.
Family and Friends
You can help family or friends with their investments without a license only if you receive no compensation of any kind. A flat fee, a share of returns, even a recurring gift understood as payment triggers the compensation element of the ABC test and pulls you into registration.1Office of the Law Revision Counsel. 15 USC 80b-2 – Definitions
De Minimis
Under the de minimis rule, an adviser can skip registration in a particular state if they have no office there and had fewer than six clients who are residents of that state in the preceding 12 months.10Securities and Exchange Commission. Final Rule – Exemption for Certain Investment Advisers Operating Through the Internet The count is rolling, and the exemption only relieves state registration in that state. It does not exempt you from registration in your home state or with the SEC.
Family Office
A wealthy family that sets up a private entity to manage its own wealth can avoid registration if the office meets three conditions: it serves only family clients, it is wholly owned and exclusively controlled by family members, and it does not hold itself out to the public as an investment adviser.11Securities and Exchange Commission. Rule 202(a)(11)(G)-1 Family Offices The definition of family member is generous, reaching all descendants of a common ancestor up to 10 generations removed plus their spouses, but the exclusion disappears the moment a non-family client is taken on.
Private Fund Advisers
An adviser who exclusively manages qualifying private funds (hedge funds, private equity, venture capital) with less than $150 million in total AUM in the United States may be exempt from full SEC registration.12eCFR. 17 CFR 275.203(m)-1 – Private Fund Adviser Exemption These advisers still file with the SEC as Exempt Reporting Advisers, submit a scaled-down Form ADV, and remain subject to SEC examination authority. It is not a route to running a public advisory business without oversight.
What Happens If You Do It Without a License
Penalties for managing money without proper registration are tiered by severity. Basic violations of the Investment Advisers Act carry civil penalties of roughly $10,800 per violation for an individual and $108,200 for a firm. When fraud is involved, those numbers rise to about $108,200 per individual and $541,200 per firm. If the fraud caused substantial losses, they climb again to roughly $216,500 per individual and over $1 million per firm.13U.S. Securities and Exchange Commission. Civil Penalties Inflation Adjustments The figures are adjusted annually for inflation.
Fines are only one layer. The SEC can order disgorgement, forcing you to return every dollar of profit from the unlicensed activity. Courts can issue injunctions permanently barring you from the securities industry. A conviction for certain misdemeanors or any felony triggers automatic disqualification from FINRA membership for 10 years, which effectively closes the industry to you regardless of how short the criminal sentence is.14FINRA. General Information on Statutory Disqualification and FINRA Eligibility Proceedings
Criminal prosecution is possible too. Willful violations of the Investment Advisers Act carry up to five years in prison and a $10,000 criminal fine per offense.15Office of the Law Revision Counsel. 15 USC 80b-17 – Penalties And an investor who was advised under a void, unregistered contract can sue to rescind the agreement and recover their entire investment plus interest.
Checking Whether Someone Else Is Licensed
If you’re on the other side of the question — an investor trying to confirm the person managing your money is actually licensed — two free tools do the job. The SEC’s Investment Adviser Public Disclosure database at adviserinfo.sec.gov lets you search any registered adviser firm or individual and pull their Form ADV, employment history, and disciplinary disclosures.16U.S. Securities and Exchange Commission. IAPD – Investment Adviser Public Disclosure FINRA’s BrokerCheck covers broker-dealer representatives, showing registration history, employment for the past 10 years, and any customer disputes, disciplinary actions, or criminal matters.17FINRA. About BrokerCheck Someone who cannot be found in either database is a serious warning sign.