Depending on the scope of authority, investment advisors may invest assets under management (“AUM”) without obtaining client approval. Investment advisors must register under the Investment Advisers Act of 1940, as amended, and comply with applicable rules governing fiduciary duty, disclosure, recordkeeping and security of the securities trading and money transfer procedures. Within this regulatory framework, therefore, the investment advisor’s agreements address issues of suitability of investment strategy in light of the client’s stated and actual appetite for risk.
Clients hiring investment advisors to outsource the asset management function enjoy the regulatory protections. At the same time, asset management clients need to conduct the same due diligence that any other enterprise might undertake to investigate the track record, risk profile, security and trustworthiness of the investment advisor as “service provider.”