Legally investing other people’s money in the United States almost always requires one of three things: registering as an investment adviser with your state or the SEC, qualifying for a specific exemption from registration, or acting under a legal arrangement like a financial power of attorney. Which path fits depends on who the money belongs to, how much of it there is, and whether you’re being paid. Getting the answer wrong is expensive. Willful violations of the Investment Advisers Act of 1940 carry fines up to $10,000 and up to five years in federal prison, so the time to sort this out is before the first trade.
When the Law Treats You as an Investment Adviser
The Investment Advisers Act of 1940 uses a three-part test. You’re an investment adviser if you (1) advise others about securities like stocks, bonds, or mutual funds, (2) do so as part of a business, and (3) receive compensation for it.1Office of the Law Revision Counsel. 15 USC 80b-2 – Definitions All three have to be present. Miss one and the definition doesn’t reach you.
Each element is read broadly. “Business” doesn’t mean it’s your day job. If you hold yourself out as a financial planner, manage assets with any regularity, or market advisory services, regulators will treat that as a business. “Compensation” is not limited to a written fee. A percentage of assets, commissions, referral payments, or any economic benefit tied to the advice can count. Even advice bundled into a broader service can qualify if the advisory piece is meaningful. “Securities” covers the usual stocks, bonds, and mutual funds, and also ETFs, options, and limited partnership interests.
If the money belongs to a friend, a parent, a client, or a pool of passive investors, and you’re being paid in any form to decide where it goes, assume you’re inside the definition until you can point to a specific exclusion or exemption.
Who Is Excluded
The statute carves out a few professionals whose advice is incidental to something else. Lawyers, accountants, engineers, and teachers are excluded when investment advice is incidental to their main professional work.1Office of the Law Revision Counsel. 15 USC 80b-2 – Definitions An accountant who suggests a client rebalance during tax planning is fine. An accountant who spins up a portfolio management service is not.
Broker-dealers are excluded when advice is incidental to executing trades and they receive no special compensation for the advisory part. Publishers of financial newspapers and publications of general circulation are excluded, which is why newsletter writers don’t register. Family offices managing wealth for a single family are excluded by rule.
These are narrow. The moment advice becomes a standalone paid service, the exclusion evaporates. Regulators look at how you market yourself, how much of your income comes from advisory work, and whether clients reasonably see you as their investment adviser.
Where to Register: State or SEC
Once you meet the definition and no exclusion applies, you have to register. Assets under management determine where.
- Under $25 million AUM: register with your home state’s securities regulator. SEC registration is prohibited in nearly every state at this level.
- $25 million to $100 million AUM: generally state registration. Advisers based in New York or Wyoming register with the SEC instead.
- $100 million to $110 million AUM: a buffer zone. SEC registration is available at $100 million and mandatory at $110 million.
- $110 million and above: SEC registration is mandatory.
An adviser already registered with the SEC doesn’t have to drop back to state registration unless AUM falls below $90 million.2SEC. Transition of Mid-Sized Investment Advisers from Federal to State Registration
Registration at either level runs through Form ADV. Part 1A covers business structure, ownership, disciplinary history, and client types. Part 2A is a plain-English brochure describing services, fees, strategies, and conflicts of interest, and clients receive it.3SEC.gov. Form ADV – General Instructions Form ADV has to be updated at least annually and amended promptly when key information changes.
Exemptions from Registration
Not everyone who fits the definition has to go through full registration, but even exempt advisers face reporting obligations and remain subject to the antifraud rules.
The private fund adviser exemption covers advisers who work exclusively with private funds and manage less than $150 million in U.S. assets.4Office of the Law Revision Counsel. 15 USC 80b-3 – Registration of Investment Advisers This is the route many early-stage hedge fund and private equity managers take. They still file a scaled-down Form ADV covering Items 1, 2, 3, 6, 7, 10, and 11, submitted within 60 days of relying on the exemption.3SEC.gov. Form ADV – General Instructions
The intrastate exemption applies if every client lives in the state where you keep your principal office and you don’t advise on securities listed on a national exchange. It disappears the moment you advise any private fund.4Office of the Law Revision Counsel. 15 USC 80b-3 – Registration of Investment Advisers
A de minimis provision keeps states from requiring registration if you have no office in that state and had fewer than six clients there during the preceding 12 months.5Federal Register. Exemption for Certain Investment Advisers Operating Through the Internet It’s a rolling window, and clients who terminated during the year still count.
Every exemption is conditional. If your circumstances change and you no longer qualify, you register or you stop advising. There is no grace period.
The Series 65 Exam
Registration is the firm-level requirement. The people who actually deliver investment advice typically need to pass the Series 65 exam, formally the NASAA Uniform Investment Adviser Law Examination. It has 130 scored questions, runs three hours, requires 92 correct answers to pass, and costs $187.6FINRA.org. Series 65 – Uniform Investment Adviser Law Exam
Most states waive the Series 65 for individuals holding certain professional designations: CFP, CFA, ChFC, or PFS.7NASAA. Exam FAQs The waiver isn’t automatic everywhere. Each state decides which designations it accepts and may require background checks and fees on top, so confirm with your state’s securities administrator before assuming a designation alone gets you licensed.
What Fiduciary Duty Requires of You
Every investment adviser owes a fiduciary duty to clients, whether fully registered or operating under an exemption. The SEC’s 2019 interpretation splits the duty into care and loyalty.8U.S. Securities and Exchange Commission. Commission Interpretation Regarding Standard of Conduct for Investment Advisers
The duty of care means the advice must genuinely serve the client’s best interest given their financial situation, goals, and risk tolerance. It includes seeking best execution reasonably available and monitoring the portfolio over the course of the relationship. Set-it-and-forget-it does not satisfy the standard.
The duty of loyalty means your financial interest doesn’t come ahead of the client’s. Where a conflict exists, you either eliminate it or disclose it fully and get informed consent. Vague disclosures buried in fine print are not enough. The SEC has said disclosure has to be specific enough for the client to actually understand the conflict and make a meaningful choice.
Handling Client Money and Keeping Records
If you have custody of client assets, meaning you hold their funds or securities or have authority to withdraw them, those assets must sit with a qualified custodian: an FDIC-insured bank, a registered broker-dealer, or a registered futures commission merchant. Client money does not go into your bank account.9eCFR. 17 CFR 275.206(4)-2 – Custody of Funds or Securities of Clients by Investment Advisers
The custodian holds assets either in separate accounts under each client’s name or in accounts holding only client funds under the adviser’s name as agent or trustee. Commingling client assets with your own is treated as a fraudulent practice under the Act. Clients also get account statements directly from the custodian, giving them an independent way to check that the money is where it should be.
Registered advisers keep detailed records of the advisory business for at least five years: cash receipts and disbursements journals, memoranda of every trade order, copies of all written communications with clients about recommendations or transactions, and all documents supporting any performance figures used in marketing.10SEC.gov. Books and Records to Be Maintained by Investment Advisers Regulators examine this paper trail during inspections, and gaps create problems quickly.
What You Cannot Do
The Act broadly prohibits fraud and deception in the advisory relationship. Specifically, an adviser cannot use any scheme to defraud a client, engage in any practice that operates as fraud or deceit on a client, or trade with a client’s account for the adviser’s own benefit without written disclosure and consent.11Office of the Law Revision Counsel. 15 USC 80b-6 – Prohibited Transactions by Investment Advisers
That last point trips up more advisers than you’d expect. Selling a security from your personal portfolio into a client’s account, or buying one from a client’s account into yours, requires written disclosure that you’re on the other side of the trade and the client’s consent before it closes. Every time, not just the first time.
Penalties for Getting It Wrong
Criminal penalties for willfully violating the Act reach a fine of up to $10,000, imprisonment for up to five years, or both.12Office of the Law Revision Counsel. 15 USC 80b-17 – Penalties “Willfully” does not necessarily mean you intended to break the law. Courts have generally held that it means you intended to do the act that turned out to be illegal, even if you didn’t know it was.
On the civil side, the SEC can seek injunctions shutting down the advisory business, disgorgement of every dollar in fees or profits, and civil monetary penalties on top. In a 2025 case, three investment adviser representatives agreed to pay a combined total of nearly $540,000 in disgorgement, prejudgment interest, and civil penalties, along with six-month industry suspensions.13U.S. Securities and Exchange Commission. Three Investment Adviser Representatives Settle SEC Charges
State regulators run their own enforcement tracks, which can include revoking registration, imposing fines, and referring cases for criminal prosecution under state securities laws. Operating without registration when you should be registered is itself a violation, even if no client has been defrauded.
Managing Investments Under a Power of Attorney
A different legal path applies when you manage investments for someone who has granted you authority through a financial power of attorney. A POA is a legal document where a principal authorizes an agent to handle financial matters on their behalf, which can include buying and selling securities, managing brokerage accounts, and making investment decisions.14Consumer Financial Protection Bureau. What Is a Power of Attorney (POA)?
Acting under a POA is distinct from being an investment adviser because you aren’t offering advice for compensation as a business. You’re stepping into the principal’s shoes to execute decisions for them. This is the common structure inside families, particularly when an aging parent needs help managing finances or when someone becomes incapacitated.
The agent under a POA still owes fiduciary duties to the principal. You act in good faith, stay within the authority the document grants, keep the principal’s property completely separate from your own, and keep records of every transaction. Using POA authority to benefit yourself at the principal’s expense is a fast track to civil liability and potentially criminal charges for financial exploitation.
Investment Clubs and Informal Arrangements
Investment clubs, where a group of people pool money and make joint investment decisions, generally don’t need to register with the SEC or register the offer and sale of their membership interests.15U.S. Securities and Exchange Commission. Investment Clubs The key is that members are collectively deciding what to do with their own pooled money, not paying one person for advice.
That structure breaks down when one person starts calling all the shots or when the club begins taking money from passive investors with no role in decisions. At that point you’re potentially operating an unregistered investment company or acting as an unregistered adviser. To manage a pool of other people’s money where they’re passive, you’re looking at forming a private fund under one of the exemptions above, with the registration and reporting that comes with it.
The informal “I’ll invest your money for you” arrangement between friends or family, with no POA and no registration, is the scenario most likely to create legal problems. Even if everyone trusts each other and nobody intends anything improper, you’re giving investment advice as a compensated business the moment you take a cut of profits or charge a management fee. Good intentions don’t create legal exemptions.