What Is an Advisory Account and How Does It Work?

Investors looking for professional guidance often turn to advisory accounts, which provide personalized investment management with ongoing support. Unlike traditional brokerage accounts where investors make their own decisions, these accounts involve a financial advisor who helps shape and adjust the portfolio based on specific goals and risk tolerance.

Key Attributes

Advisory accounts operate under a fiduciary standard, requiring advisors to act in the client’s best interest. This standard, established by the Investment Advisers Act of 1940, is enforced by the Securities and Exchange Commission (SEC) or state regulators, depending on the firm’s assets under management. Brokers, by contrast, follow a suitability standard, meaning they can recommend appropriate products without necessarily prioritizing cost efficiency or long-term benefits.

Most advisory accounts are managed on a discretionary basis, allowing advisors to make trades without client approval for each transaction. This enables timely portfolio adjustments in response to market fluctuations, tax considerations, or financial goals. Tax-loss harvesting can offset capital gains, reducing taxable income, while automatic rebalancing ensures asset allocations remain aligned with the client’s risk profile.

Transparency is a key feature. Advisors must file Form ADV with the SEC, detailing compensation structures, potential conflicts of interest, and investment methodologies. Clients receive quarterly performance reports outlining returns, asset allocations, and fees deducted, allowing them to assess whether the advisor’s strategy aligns with their financial goals.

Typical Investment Options

Advisory accounts offer a broad range of investment choices tailored to an investor’s objectives, risk tolerance, and time horizon. Exchange-traded funds (ETFs) are commonly used for their low expense ratios, tax efficiency, and market exposure. Advisors often construct portfolios using ETFs that track major indices like the S&P 500 or sector-specific funds in industries such as technology, healthcare, or clean energy.

Mutual funds, particularly actively managed ones, are another common component. These funds aim to outperform the market through security selection and tactical asset allocation.

Individual stocks and bonds provide customization. Advisors may select stocks based on fundamental analysis, considering metrics like price-to-earnings ratios, dividend yields, and earnings growth. Fixed-income securities, including municipal bonds, corporate bonds, and U.S. Treasuries, offer income and help manage volatility. Some advisors use bond laddering, holding bonds with staggered maturities to reduce interest rate risk.

Alternative investments, such as real estate investment trusts (REITs), private equity funds, and hedge funds, can enhance diversification and potentially boost returns. These assets often have higher barriers to entry, such as accreditation requirements or liquidity constraints, but can provide stability during market downturns. Commodities like gold and silver may be included as an inflation hedge, while structured products offer tailored risk-return profiles.

Fee Structures

Advisory accounts use different pricing models, which can impact overall investment returns. Unlike commission-based brokerage accounts, where fees depend on individual trades, advisory fees are typically based on assets under management (AUM), an hourly retainer, or a combination of both.

Percentage of Assets

The most common fee model is a percentage of AUM, where advisors charge an annual fee based on portfolio value. The Investment Adviser Association’s 2023 Industry Snapshot reports a median advisory fee of about 1.00% for portfolios under $1 million, with tiered reductions for larger accounts. For example, an advisor might charge 1.00% on the first $1 million, 0.75% on the next $2 million, and 0.50% beyond that. This structure ties advisor compensation to portfolio performance, as higher account values generate increased fees.

Regulatory filings, such as Form ADV Part 2A, require advisors to disclose fee schedules and additional costs like custodial fees, trading commissions, or third-party fund expenses. Investors should also consider tax implications, as advisory fees may be deductible under Internal Revenue Code 212 if incurred for taxable investment income, though the Tax Cuts and Jobs Act of 2017 suspended this deduction for individuals through 2025.

Hourly Retainer

Some advisors charge an hourly rate or a fixed retainer for financial planning and investment management. Hourly fees typically range from $150 to $500 per hour, depending on the advisor’s experience, credentials, and location. Retainer agreements may be structured as monthly or annual payments, covering portfolio oversight, financial planning, and periodic consultations.

This model benefits investors who need specific guidance rather than continuous management. For example, a client seeking a one-time asset allocation review or estate planning strategy may prefer an hourly arrangement. However, frequent consultations can add up, making it important to clarify the scope of services covered under the retainer. Unlike AUM-based fees, retainers do not fluctuate with portfolio performance, which may reduce conflicts of interest but also means compensation is not directly tied to investment returns.

Mixed Fee

A hybrid approach combines AUM-based fees with hourly or fixed retainers, offering flexibility based on client needs. For instance, an advisor might charge 0.50% of AUM for investment management while billing separately for financial planning services, such as retirement projections or tax optimization strategies.

Hybrid models are often used by high-net-worth individuals with complex financial situations requiring specialized planning. For example, a business owner structuring a tax-efficient charitable giving plan may benefit from targeted advisory services beyond standard portfolio management. Investors should review fee disclosures carefully to ensure transparency and avoid overlapping charges, as some firms bundle services that may not be necessary for all clients.

Regulatory Considerations

Advisory accounts are subject to oversight to ensure transparency and investor protection. The SEC regulates firms managing over $100 million in assets, while smaller firms fall under state jurisdiction. Advisors must register through the Investment Adviser Registration Depository (IARD) and comply with the Investment Advisers Act of 1940, which includes maintaining accurate records, implementing written compliance policies, and conducting annual regulatory reviews.

Managing conflicts of interest is a key regulatory requirement. The SEC’s Regulation Best Interest (Reg BI) requires dual-registered advisors—those operating as both fiduciaries and broker-dealers—to disclose and mitigate conflicts that could influence investment recommendations. This is particularly relevant when advisors receive compensation from proprietary investment products or revenue-sharing agreements with fund managers. Form CRS (Customer Relationship Summary) mandates concise disclosure of fee structures, potential conflicts, and disciplinary history, ensuring clients can make informed decisions.

Opening Process

Setting up an advisory account begins with an initial consultation, where the advisor gathers information about the client’s income, assets, liabilities, investment experience, and long-term goals. This stage often includes a risk assessment questionnaire to determine the appropriate asset allocation. Liquidity needs, retirement horizon, and tax considerations influence the portfolio’s structure.

Once the advisor develops an investment plan, the client completes account-opening paperwork outlining fiduciary responsibilities, fee structure, and discretionary authority, if applicable. Regulatory disclosures, such as Form ADV and Form CRS, must be reviewed and signed to ensure transparency regarding potential conflicts of interest and compensation models.

The account is funded through cash deposits, asset transfers, or rollovers from existing brokerage or retirement accounts. Many firms use third-party custodians to hold client assets, ensuring separation between advisory services and asset safekeeping. After funding, the advisor implements the investment strategy, monitors performance, and conducts periodic reviews to adjust allocations based on market conditions or changes in the client’s financial situation.