An advisory account is an investment account managed by a financial advisor who provides personalized advice and portfolio management on behalf of the client, typically for a fee.
An advisory account is a type of investment account where a financial advisor or wealth manager makes investment decisions and provides ongoing advice tailored to the client's financial goals, risk tolerance, and investment horizon. This account is distinguished by the discretionary or non-discretionary authority given to the advisor to buy, sell, and manage the client’s assets. Advisory accounts are commonly used in wealth management for high-net-worth individuals, family offices, and institutional investors seeking professional oversight of their portfolios. In a financial advisory relationship, the advisor constructs and maintains the portfolio according to a pre-agreed investment policy statement, adjusting holdings as market conditions or client circumstances change. The advisor typically charges a fee based on assets under management (AUM), which aligns their compensation with the performance and growth of the client's portfolio. Advisory accounts can include a wide range of investment vehicles including stocks, bonds, mutual funds, ETFs, and alternative investments.
Advisory accounts play a crucial role in investment strategy by offering a structured, expert-driven approach to managing complex portfolios. The professional management helps ensure disciplined implementation of asset allocation, risk management, and performance monitoring. This level of oversight is particularly important in family offices where preserving and growing multi-generational wealth requires expert governance and tailored investment decisions. From a reporting and tax planning perspective, advisory accounts often provide comprehensive statements and tax documentation which support efficient year-end tax strategies and compliance. The advisory relationship also helps streamline governance by providing a trusted fiduciary to act in the best interest of the family’s wealth, enhancing transparency and accountability.
A family office opens an advisory account with a wealth management firm, funding the account with $5 million. The advisor creates a diversified portfolio aligned with the family's investment objectives and risk tolerance. With an advisory fee of 1% annually, the advisor manages the investments, making asset allocation adjustments and rebalancing quarterly. Over one year, the portfolio grows by 8%, generating $400,000 in gains before fees. After deducting the $50,000 advisory fee, the family retains a net return of 7% ($350,000) with professional management and reporting.
Advisory Account vs Brokerage Account
While both advisory and brokerage accounts allow investors to hold and trade securities, an advisory account involves a financial advisor managing the portfolio and providing personalized investment advice for a fee, whereas a brokerage account allows clients to make their own investment decisions and may charge commissions per trade. Advisory accounts are suited for clients seeking professional management and ongoing guidance, while brokerage accounts offer more control and potentially lower fees for self-directed investors.
What is the main difference between an advisory account and a brokerage account?
An advisory account is managed by a financial advisor who makes investment decisions and provides ongoing advice for a management fee, while a brokerage account typically allows investors to make their own trades and decisions, paying commissions or fees per transaction.
Can I retain control over investment decisions in an advisory account?
Yes, advisory accounts can be discretionary, where the advisor acts independently, or non-discretionary, where the advisor provides recommendations but you retain final decision-making authority.
How are fees typically structured in an advisory account?
Fees in advisory accounts are usually based on a percentage of assets under management (AUM), often ranging between 0.5% and 1.5% annually, aligning the advisor's incentives with portfolio performance.
