The Investment Advisers Act of 1940 permits an IA to pay a fee to a person who solicits advisory clients only if these two conditions are met:

  • The IA is registered with the SEC.

  • The solicitor has never been suspended, expelled, limited or barred from associating with an investment advisor by the SEC.

If solicitation is permitted, the following rules apply:

  • There must be a written agreement between the IA and the solicitor, which must require compliance with the Investment Advisers Act of 1940.

  • The solicitor must provide a copy of the IA's disclosure document to the potential client at the time of solicitation.

  • The solicitor must provide a separate disclosure document to the potential client that spells out the names of the solicitor and the IA, the nature of the relationship between the two, a statement that the IA will pay the solicitor, and the amount above the regular advisory fee that the client will be charged due to the use of the solicitor.

  • The IA must obtain a signed and dated acknowledgement from the client stating that he or she has received both the IA's and the solicitor's disclosure documents by the time the advisory contract is entered into.


Exam Tips and Tricks
It is important to know the rules for both general advertising and performance advertising. You can expect fewer questions on advisory contracts and solicitations. Here is a question you might encounter on the exam:

Which of the following statements about IA advertising is FALSE under the Investment Advisers Act of 1940?

  1. A performance record may only be used if it contains a disclaimer on the first page that states there is no assurance that future results will be as good as the reported results.
  2. The IA may not advertise a formula without a disclaimer that refers to the limitations and difficulties of relying on any one formula or system.
  3. Testimonials may be used only if written consent has been obtained from the client and the testimonial is not misleading in any way.
  4. A performance record may be used only if the results are for at least one year.

The correct answer is "c": testimonials may not be used in IA advertising.



Compensation

Related Articles
  1. Investing

    How Google & Twitter Compete with Facebook's Instant Articles (FB, GOOG)

    Look at how Facebook's Instant Articles feature works, and how it differs from the new Accelerated Mobile Pages feature from Google and Twitter.
  2. Financial Advisor

    RIAs: Watch the SEC’s Advertising Reg Fine Print

    Advisors need to understand the SEC's advertising rules to avoid potential liability and enforcement actions.
  3. Financial Advisor

    Growth Strategies For Financial Advisors

    These 5 strategies offer financial advisors a blueprint on how to grow their practices.
  4. Investing

    Advisory Fees On The Series 66 Exam

    Learn what you need to know about investment advisory fees and contracts to pass the Series 66 exam.
  5. Financial Advisor

    Advisors Should Be Ready for These 5 Questions

    Advisors should be prepared to provide answers to these common questions asked by prospective clients.
  6. Managing Wealth

    Asset Manager Ethics: Disclosures

    Effective communication and disclosures go a long way towards easing minds and creating a lasting and trusting symbiotic relationship. Here are the four steps to making good disclosures.
  7. Financial Advisor

    Losing a Client Is Not Always The End of The World

    Losing a client is never pleasant for a financial advisor, but sometimes this is a better outcome than continuing the relationship.
  8. Financial Advisor

    3 Reasons to Fire Your Advisor

    There is no reason for a client to stay with a financial advisor who is not serving his or her needs. Here are some red flags to look out for.
  9. Financial Advisor

    Top Tips for Inheriting a Book of Clients

    Inheriting another advisor's book of clients can be a big boon. Here are some tips on how to handle the transition.
  10. Financial Advisor

    How the New Fiduciary Rule Will Impact Investors

    The DOL's new fiduciary rule is now in effect. Here are a few areas where individual investors, including clients and prospects, might notice some change.
Frequently Asked Questions
  1. Depreciation Can Shield Taxes, Bolster Cash Flow

    Depreciation can be used as a tax-deductible expense to reduce tax costs, bolstering cash flow
  2. What schools did Warren Buffett attend on his way to getting his science and economics degrees?

    Learn how Warren Buffett became so successful through his attendance at multiple prestigious schools and his real-world experiences.
  3. How many attempts at each CFA exam is a candidate permitted?

    The CFA Institute allows an individual an unlimited amount of attempts at each examination.Although you can attempt the examination ...
  4. What's the average salary of a market research analyst?

    Learn about average stock market analyst salaries in the U.S. and different factors that affect salaries and overall levels ...
Trading Center