Investment companies: the three types, investment firms and how to choose one

• $45.1 trillion in US-registered investment companies at the end of 2025, according to the Investment Company Institute: $31.4 trillion in mutual funds and $13.4 trillion in ETFs.
• Three legal types under the 1940 Act: management companies, open-end (mutual funds, most ETFs) or closed-end, unit investment trusts, and face-amount certificate companies.
• An investment firm is not always an investment company: an adviser who manages your money is regulated by the Investment Advisers Act of 1940, a broker by the SEC and FINRA.
• Check before you invest: the SEC's adviser database and FINRA BrokerCheck are free, and every firm must give retail clients a short relationship summary, Form CRS.

The word covers very different businesses. A fund that holds 500 stocks for millions of shareholders is an investment company. The firm that runs that fund is an investment adviser. The broker that holds your account and buys the fund for you is a broker-dealer. The planner who builds your portfolio may be any of these, or several at once. Knowing who is who tells you who is responsible for what, what protects your money and how much each layer costs.

This guide explains what an investment company is under the law, its three types, how investment advisers, brokers and wealth managers differ, and how to choose and check a firm, with a worked example of what fees cost over thirty years. Figures come from the Investment Company Institute's 2026 Fact Book and the 2026 Investment Adviser Industry Snapshot.

What is an investment company?

The SEC's investor website defines an investment company as a company that pools money from many investors and invests it primarily in securities, such as stocks, bonds and short-term debt. Each investor owns shares that represent a slice of the portfolio and of the income it produces. The fund itself usually has no employees: an investment adviser manages the portfolio for a fee taken from the fund's assets, and a custodian holds the securities.

Investment companies register with the SEC under the Investment Company Act of 1940, and their shares are generally registered under the Securities Act of 1933. The 1940 Act governs how they are organized and run: disclosure to investors through a prospectus and regular reports, limits on transactions with their managers, custody of their assets, and for most funds a board of directors that oversees the adviser.

The three types of investment companies

The 1940 Act sorts investment companies into three classes, and splits the largest one in two:

ETFs are therefore investment companies too: most are registered as open-end funds, and a few of the oldest and largest are unit investment trusts. The guide to index funds, ETFs and mutual funds explains how these three products differ in trading, taxes and cost.

How big they are

Behind these assets are mostly households. According to the ICI, 76.0 million US households, or 56.4%, owned registered funds in 2025, about 128.7 million people, and the median mutual fund-owning household held $125,000 in them.

Investment company, investment firm, wealth manager: who does what

When people search for “investment companies” or “investment management firms”, they usually mean the businesses that will handle their money. There are four main roles, and one firm can hold several:

• Fund managers create and run funds. The fund is the investment company; the manager is an investment adviser paid out of the fund's assets, through its expense ratio.
• Investment advisers are paid to give advice or manage portfolios, under the Investment Advisers Act of 1940. Larger firms register with the SEC, smaller ones with their state securities regulator. The 2026 Investment Adviser Industry Snapshot counted 16,544 SEC-registered advisers at the end of 2025, managing $176.8 trillion in regulatory assets for 73.7 million clients; 92.8% of them employ 100 people or fewer.
• Broker-dealers buy and sell securities for clients and usually hold their accounts. They register with the SEC and are members of FINRA. Since June 30, 2020, Regulation Best Interest requires them to act in a retail customer's best interest when they recommend an investment.
• Wealth managers are usually advisers who combine portfolio management with financial planning, taxes and estate planning, often for clients with larger balances.

The standards differ. An adviser owes clients a fiduciary duty, as interpreted by the SEC in 2019, which covers the whole relationship, including monitoring when it has agreed to. A broker's best-interest obligation applies at the time of a recommendation. Many firms are dually registered, acting as adviser on some accounts and broker on others: the Form CRS they must hand over says which role applies to what.

How to choose an investment company or firm

1. Check registration and history

Investor.gov's search tool covers both advisers and brokers. The SEC's Investment Adviser Public Disclosure database shows an adviser's Form ADV, and FINRA BrokerCheck shows a broker's licenses, employment history and any disciplinary actions. A fund's prospectus and reports are free on the SEC's EDGAR database. A firm or person that appears in none of these is a red flag.

2. Read Form CRS and Form ADV

Form CRS is a short relationship summary, a few pages at most, that both advisers and brokers must give retail investors: services, fees, conflicts of interest and disciplinary history, in plain language. An adviser's Form ADV Part 2A brochure goes further on fees and conflicts. Five minutes with both documents answers most of the questions worth asking.

3. Compare the total cost, layer by layer

Costs stack up: the fund's expense ratio, the adviser's fee, often a percentage of assets each year, commissions and account fees. Fund fees have fallen sharply: according to the ICI, the asset-weighted average expense ratio of equity mutual funds was 0.40% in 2025, against 0.99% in 2000, and 0.36% for bond funds, against 0.76%. The difference compounds over time:

Between the cheapest and the most expensive line, 1.35 percentage points a year cost about $181,000, close to a third of the final balance. A fee is worth paying when the service is worth more than that: planning, tax work, discipline in bad markets. It is never free.

4. Know where your assets are held

A fund's securities are held by a custodian, separate from the manager. An account at a broker-dealer is covered by SIPC up to $500,000, including $250,000 in cash, if the firm fails, but not against market losses. The guide to brokerage accounts details these protections.

5. Watch for red flags

Guaranteed high returns, pressure to decide quickly, an unregistered firm, a request to wire money to a personal account or to buy crypto for an “opportunity”: each is a warning sign on its own. A legitimate firm accepts questions and puts its fees in writing.

The best investment companies: criteria, not a ranking

There is no single best investment company: the right one depends on what you need. The criteria that matter, in order: registration and a clean record, total costs, the range of low-cost index funds available, how your assets are held, the minimum to open an account, and the quality of service when something goes wrong. A firm that wins on all six for one investor can be a poor fit for another.

Wealth management platforms and software

Wealth management software covers two different things. For investors, it means apps that gather accounts from several banks and brokers into one view of net worth, spending and goals. For professionals, it means the platforms advisers use to manage client portfolios, trades and reports. A robo-adviser, which builds and rebalances portfolios with algorithms, is an investment adviser too: it registers with the SEC and files a Form ADV like any other.

Investment companies: the key points

1. An investment company pools money and invests it in securities: mutual funds, ETFs, closed-end funds and UITs, registered under the 1940 Act.
2. An investment firm can be an adviser, a broker or both, under different rules and different duties.
3. Check every firm on Investor.gov, the SEC adviser database or BrokerCheck before sending money.
4. Add up every layer of fees: fund, advice, commissions, account.
5. Know who holds your assets and what protects them if the firm fails.

This guide is educational and is not personalized investment advice. Figures are those of the ICI 2026 Fact Book and the 2026 Investment Adviser Industry Snapshot, for year-end 2025.

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