Table of Contents
SERIES 65 | FINANCIAL REGULATION COURSES
Investment management is the professional discipline of building, managing, and monitoring investment portfolios on behalf of individual and institutional clients — encompassing the full range of activities from establishing investment objectives and developing capital market expectations through asset allocation, security selection, portfolio construction, ongoing monitoring, and rebalancing — with the goal of achieving specified financial objectives within defined risk parameters for the benefit of the investors whose capital is being managed.
Investment management is also called asset management — particularly in institutional contexts — and the two terms are used interchangeably to describe the professional function of managing financial assets including equities, fixed income instruments, real estate investment trusts, alternative investments, and other financial instruments on behalf of clients who entrust their capital to professional managers rather than managing it themselves.
For the purposes of federal securities regulation, investment management is the primary activity of registered investment advisers subject to the Investment Advisers Act of 1940 — professionals who provide investment advice for compensation and who are therefore subject to registration requirements, the fiduciary duty derived from Section 206 of the Act, and the comprehensive oversight of the Securities and Exchange Commission or applicable state securities regulators. Investment management is the foundational professional activity tested throughout the Series 65 examination — every topic in the curriculum ultimately relates to the professional and regulatory context within which investment management is conducted.
Investment management encompasses a spectrum of activities that together constitute the complete professional management of a client's investment portfolio from initial engagement through ongoing stewardship.
The process begins with client assessment — understanding the investor's financial objectives, risk tolerance, time horizon, liquidity needs, tax circumstances, and any unique constraints or preferences that will shape the investment mandate. This assessment is documented in the investment policy statement — the foundational governing document of the managed portfolio that translates the client's investment profile into specific, actionable portfolio construction guidance.
With the investment policy statement established, the investment manager develops capital market expectations — forward-looking estimates of the expected return, risk, and correlation characteristics of the available asset classes — and uses these expectations to identify the strategic asset allocation on the efficient frontier that best reflects the client's risk-return objectives. The strategic asset allocation is the most consequential investment management decision — empirically documented as the primary driver of long-run portfolio return variability by the Brinson, Hood, and Beebower 1986 study.
Security selection within each asset class — choosing specific equities, fixed income instruments, mutual funds, exchange-traded funds, and alternative investments to populate the strategic allocation — is the implementation layer of investment management. The choice between active management — seeking alpha through superior security selection — and passive management — capturing asset class returns through low-cost index funds and exchange-traded funds — is one of the most consequential implementation decisions in investment management, with the empirical evidence strongly supporting passive approaches for most asset classes after accounting for the fee drag of active management.
Ongoing monitoring and portfolio rebalancing maintain the portfolio's alignment with the strategic allocation and the client's evolving circumstances — reviewing performance against benchmarks, assessing whether the client's investment policy statement remains appropriate as their life circumstances change, and executing rebalancing trades to restore strategic allocation targets when market movements cause actual weights to drift materially from intended targets.
The distinction between active and passive investment management is one of the most directly and extensively tested concepts in the Series 65 examination curriculum — requiring candidates to understand the philosophical premises, practical mechanics, and empirical evidence relevant to each approach.
Active investment management seeks to generate alpha — returns above a specified benchmark index — through superior security selection, tactical asset allocation, or both. Active managers conduct fundamental analysis of individual securities, macroeconomic analysis of sectors and geographies, and quantitative analysis of valuation metrics and return momentum — seeking to identify securities that the market has mispriced and that offer expected returns above what their systematic risk justifies in the Capital Asset Pricing Model framework.
The premise of active management is that markets are not fully efficient — that there exist systematic mispricings in security prices that skilled managers can identify and exploit consistently enough after fees to generate positive alpha for their clients. The efficient market hypothesis — particularly in its semi-strong form, which holds that all publicly available information is already reflected in current market prices — challenges this premise, arguing that the mispricings active managers seek to exploit do not exist in a persistent and exploitable form.
The empirical evidence on active management is extensive and broadly consistent — the majority of actively managed equity funds underperform their benchmark index after fees over any sufficiently long evaluation period. Research by S&P Dow Jones Indices through the SPIVA scorecard consistently finds that more than seventy percent of actively managed large-cap equity funds underperform the S&P 500 over ten-year and fifteen-year periods after fees — with the underperformance primarily attributable to management fees, transaction costs, and the difficulty of consistently identifying genuinely mispriced securities in efficiently priced large-cap markets.
Passive investment management — through low-cost index funds and exchange-traded funds that track broad market indices — provides diversified exposure to entire asset classes at minimal cost, with minimal transaction costs, minimal tracking error, and dramatically lower management fees than active strategies. The lower cost of passive management means that passive investors capture more of the gross market return than active investors who pay higher fees for the opportunity to potentially outperform — an opportunity that the empirical evidence suggests most active managers fail to consistently realise.
An important practical and regulatory distinction in investment management is whether the manager has discretionary authority over the client's portfolio — the ability to execute investment decisions without obtaining specific client approval for each transaction — or operates on a non-discretionary basis — requiring client approval before executing any trade.
Discretionary investment management is the standard model for institutional portfolio management and most retail investment advisory relationships — the investment adviser constructs and manages the portfolio in accordance with the investment policy statement and executes trades as professional judgment dictates without consulting the client before each transaction. Discretionary authority enables more efficient portfolio management — allowing the adviser to respond promptly to market developments, execute rebalancing trades systematically, and implement investment strategies consistently across client accounts.
Non-discretionary investment management — in which the adviser provides recommendations and the client approves each transaction before execution — is more common in certain retail contexts, particularly where clients want to remain closely involved in investment decisions or where the relationship involves a small number of significant individual securities transactions rather than continuous portfolio management.
The fiduciary duty of registered investment advisers under the Investment Advisers Act of 1940 applies equally in both contexts — whether operating with discretionary or non-discretionary authority, the investment adviser is required to act in the client's best interest at all times, to disclose all material conflicts of interest, and to provide investment advice tailored to the client's specific and documented investment objectives.
Investment management clients are broadly divided into two categories — institutional and retail — each with different characteristics, different investment needs, and different regulatory treatment.
Institutional investment management serves organisations that invest on behalf of their constituents — pension funds managing retirement assets for employees, endowments managing long-term capital for universities and non-profits, insurance companies managing investment portfolios to fund future insurance obligations, sovereign wealth funds managing national reserves, and foundations managing charitable assets. Institutional investors typically have larger asset bases, longer investment horizons, more sophisticated understanding of investment markets, and greater access to alternative investments including private equity, hedge funds, and direct lending — accessing investment strategies unavailable to most retail investors.
Retail investment management serves individual investors and families — managing personal investment portfolios, retirement accounts, education funding accounts, and other personal financial assets. Retail investors typically have smaller portfolios, greater sensitivity to liquidity needs, more complex tax circumstances at the individual level, and less familiarity with sophisticated investment instruments than institutional investors. The regulatory framework is correspondingly more protective for retail investors — requiring greater disclosure, imposing suitability standards, and in the case of registered investment advisers imposing the full fiduciary duty that places the client's interests above all others.
Wealth management — the comprehensive advisory model serving high-net-worth and ultra-high-net-worth individuals — occupies a position between institutional and conventional retail investment management, providing institutional-quality portfolio construction and access to alternative investments alongside the comprehensive financial planning, tax strategy, and estate planning services that complex individual financial situations require.
Investment management conducted for compensation is investment advisory activity subject to the registration and conduct requirements of the Investment Advisers Act of 1940. Investment managers — whether individuals operating as sole practitioners or large firms managing trillions of dollars — who provide portfolio management services for compensation are investment advisers under Section 202(a)(11) of the Act and must register with the Securities and Exchange Commission if they manage one hundred million dollars or more in regulatory assets under management, or with the applicable state securities regulator if they manage less than that threshold.
Registered investment advisers providing investment management services are subject to the comprehensive fiduciary duty derived from Section 206 of the Investment Advisers Act — requiring continuous loyalty to the client's best interests, disclosure of all material conflicts of interest, and care in the provision of investment advice tailored to each client's specific circumstances. The SEC's 2019 fiduciary interpretation — Release IA-5248 — confirmed that this duty applies continuously throughout the investment management relationship including when executing portfolio trades, selecting broker-dealers for trade execution, voting proxies on behalf of client accounts, and managing all other aspects of the investment mandate.
Individual investment managers working within registered investment advisory firms must register as investment adviser representatives — typically requiring passage of the Series 65 examination or the Series 66 examination as the primary state law qualification — and comply with applicable conduct standards on an ongoing basis.
The Form ADV brochure delivered to clients discloses the investment manager's services, fee schedule, investment strategies, conflicts of interest, and disciplinary history — providing the transparency that enables clients to make informed decisions about whether to engage a specific investment manager and to evaluate the ongoing appropriateness of the investment management relationship.
Investment management is tested on the Series 65 examination as the primary professional activity of registered investment advisers — in the context of the fiduciary duty framework, the investment policy statement, active versus passive management, discretionary versus non-discretionary authority, and the regulatory requirements applicable to investment management professionals.
The key points to retain are these.
Investment management is the professional discipline of building and managing investment portfolios to achieve specified financial objectives within defined risk parameters for the benefit of investors — encompassing client assessment, investment policy statement development, strategic asset allocation, security selection, portfolio construction, ongoing monitoring, and rebalancing. Active management seeks alpha through superior security selection and tactical allocation — the empirical evidence shows the majority of actively managed funds underperform benchmark indices after fees. Passive management through low-cost index exchange-traded funds captures asset class returns at minimal cost — the dominant approach by evidence.
Discretionary investment management allows the adviser to execute trades without specific client approval per transaction — non-discretionary requires client approval before execution. Institutional clients — pension funds, endowments, foundations, insurance companies — have larger assets, longer horizons, and greater access to alternative investments. Retail clients — individuals and families — require greater regulatory protection through fiduciary and suitability standards.
Investment managers are investment advisers under the Investment Advisers Act of 1940 — subject to registration with the SEC if managing one hundred million dollars or more in regulatory assets under management, or with state regulators below that threshold. The fiduciary duty requires continuous loyalty and care throughout the investment management relationship. Individual investment managers register as investment adviser representatives — typically requiring the Series 65 or Series 66 examination — and comply with Form ADV disclosure requirements.
