The field of finance can seem fragmented, with differing roles played by individuals and institutions. While there can be overlapping functions, there are clear differences between finance service providers. Finance professionals may conduct investment activities on behalf of the company they work for, or on behalf of investors who are clients of the company. Larger firms are often called institutional investors, while individuals and non-professionals are often called retail investors.

An investment adviser (IA) provides advice to clients about securities such as stocks, bonds, investment funds, and certain other investment products. Some IAs also offer financial planning services, and some manage investment portfolios in client-owned accounts. It is common for IAs who advise individuals to have a retirement-focused approach to investments. IAs are required to maintain registration with the SEC or state regulators. Independent IAs that provide investment management services use brokerage firms for account custodial services.

Brokerage firms are like banks for investments, holding client investments in client-owned accounts. Also called broker-dealers, brokerages are in the business of buying and selling securities on behalf of its customer as a broker, or for its own account as a dealer. Brokerage firms range from large full-service firms that may offer investment planning or have in-house research operations, to self-directed firms that may offer lower cost accounts for clients who choose investments on their own. Brokerages may be dually registered as a broker-dealer and an IA, providing financial advice through its IA division that is carried out within its brokerage division.

Fund Managers…
While IAs and brokers may manage client portfolios in individual, client-owned accounts, fund managers oversee single investment funds that are made available to multiple investors. For example, individual investors can own shares of a mutual fund or an exchange traded fund (ETF) in their own accounts. The structure and goals of a fund determine what kinds of investments it holds. Hedge funds, though somewhat similar to mutual funds and ETFs, have significant differences. Mutual funds and ETFs are available to the general public and have regulations to promote transparency, while hedge funds are private entities with less oversight. Despite the high profile of hedge funds, the mutual fund market is more than five times larger than the hedge fund market. Additionally, hedge funds are only made available to high-net worth individuals who qualify as accredited investors.

June 1, 2022

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Aesop Advisor LLC is a registered investment adviser. Aesop Advisor LLC is not registered as a broker, and does not provide brokerage services.

Markets Demystified is published the first and third Wednesdays of each month,
and explores how stock market investing can relate to personal finance.

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Jonathon Oden
Owner | Aesop Advisor LLC

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