SIC 6282 Investment Advice

SIC 6282

This category covers establishments that participate in the investment advisement industry and are predominantly engaged in furnishing information and advice to companies and individuals concerning securities and commodities. These firms serve their clients on a contract or fee basis. Establishments that provide advice but also act as brokers or dealers are excluded from this category.

NAICS CODE(S)

523920

Portfolio Management

523930

Investment Advice

INDUSTRY SNAPSHOT

A broad spectrum of advisory firms makes up the industry and is responsible for managing billions of dollars of U.S. and foreign assets every year. Mutual fund assets alone, of which investment counselors in the industry manage a significant portion, totaled $8.6 trillion in 2004. Mutual funds controlled more U.S. money than banking institutions. In the mid-2000s, about 20 percent all household assets were invested in mutual funds, up from 7 percent in 1990, and roughly 50 percent of all U.S. households owned mutual funds, which equaled 92 million shareholders in 54 million U.S. households. Individual investors hold, directly or indirectly, over 90 percent of all mutual fund assets.

The business of providing investment advice was deeply shaken in the aftermath of the terrorist attacks of September 11, 2001. Already dealing with a slow-down in the economy, investment firms reeled from the blow delivered to the U.S. economy by these events. The most apparent problem was the immediate decline of the American market. Stock prices plummeted, and investors quickly went from looking to make a profit to desperately trying to control losses. There was also an underlying problem of an overall decay of trust by investors in the dependability of the investments to provide positive results. A volatile market and poor return fueled mistrust and disillusionment among investors. A rash of accounting scandals, including Enron, also disheartened investors.

However, by 2003, the economy began to turn around and became even stronger during 2004. As a result, demand returned to the mutual fund market, and dividends increased after a two-year slide. Of those investors who held funds (excluding work retirement plans), over 80 percent owned funds through a professional financial adviser, including full-service brokers, bank representatives, accountants, insurance agents, and independent financial planners. As the market recovered, the investment advice industry once again became a highly competitive, vibrant market.

ORGANIZATION AND STRUCTURE

Futures and investment advisory firms, investment counseling services, research organizations, and mutual fund managers compose the investment advice industry. Several companies offer a multitude of services for all segments of the market, serving as "one-stop shops" for their clients' every need. Other organizations provide expertise in just one area, such as real estate investment research, indexing, or international hedging. Many of these firms form alliances with other specialty companies to deliver a package of client services. Although many firms exist solely to meet the market demand for these services, numerous industry participants offer advisory services only as a sideline. For instance, much of the advice and management of funds in the United States and abroad is provided by insurance companies and banks that are engaged primarily in other industries.

Futures and investment advisory firms typically provide advice and manage pools of funds for institutional clients. On a fee or contract basis, these firms seek to minimize their clients' exposure to risk in relation to the level of return that a client is seeking. Advisory firms that manage large pools of funds often seek the services of specialty firms that can provide expertise in a single area, such as real estate. In addition, many of these firms are often employed by larger players in the industry, such as mutual fund managers.

Investment counseling services may also assist institutions and provide services to larger firms. These firms, however, may also offer portfolio management services to individuals. Counselors will develop and manage an investment strategy that is specifically tailored to one individual's financial goals. Counselors consider the client's tax status, retirement plans, and other factors in an effort to protect and increase the client's resources. Though many firms require a minimum account size of at least seven figures, customers benefit from the individual attention. Money managers often charge between 1.5 and 3 percent of the account per year for their services.

Mutual Fund Managers

The largest single segment of the investment advice industry belongs to mutual fund managers. In 2004, there were 8,044 mutual funds. A mutual fund is effectively an investment company that pools the money of many individual investors. Investors buy shares in the fund and the company invests the shareholders' cash for them. The company hires an adviser, or management company, to develop an investment strategy and to manage the fund.

Mutual fund investors do not benefit from individualized service as they might from a personal counselor. Mutual funds, however, allow small investors access to professional investment advisers who would otherwise be inaccessible—and at a relatively low cost. Furthermore, a wide variety of funds exist that are tailored to the needs of specific types of investors, allowing people with smaller accounts to place their money in funds that match their financial needs.

Most fund advisers receive a fee for stock selection and portfolio management activities based on the average value of the assets under management. Depending on the type of services provided and the category of fund managed, fees typically range from 0.20 percent (for index funds) to more than 1 percent of average annual fund assets. The management fee is usually set on a declining scale relative to fund size. The management company may administer and pay for some or all of the following: office space and personnel; portfolio managers and traders; regulatory compliance activities; preparation and distribution of prospectuses, advertising, and shareholder documents and reports; bookkeeping, accounting, and tax services; and bonding and insurance.

Prior to the 1980s, Securities and Exchange Commission (SEC) regulations provided that fund investors could only compensate financial advisers with a one-time flat fee for both current and future services. However, in 1980, the SEC enacted Rule 12b-1 under the Investment Company Act of 1940, which gave the industry a broader range of compensation options. According to the Investment Company Institute, in 2004, so-called Rule 12b-1 funds were distributed as follows: 52 percent, payment for ongoing shareholder services; 40 percent, payment for initial investment advice; 6 percent, compensation for fund underwriters; and 4 percent, advertising and promotion. Fees collected rose significantly after the adoption of Rule 12b-1. In 1990, fees collected by funds totaled $1.1 billion; by 2004, 12b-1 funds totaled $10.5 billion, just off the record high of $11 billion set in 2000.

As of 2004, the five largest investment managers by total assets directed 39 percent of the $8.6 trillion in...

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