What it means
At its simplest, investment advice answers a personal question: given my goals, my timeframe and my tolerance for risk, what should I do with my money? It may cover which assets to hold, how much to put in each, when to rebalance and how to withdraw income in retirement.
The more the guidance is tailored to one person's situation, the more clearly it counts as advice. Regulators draw a line between advice and general information.
A website that explains how bonds work is education, while a message saying that you should sell your shares in one company and buy a named fund is advice. The line matters because giving advice usually requires registration, disclosure of conflicts and a duty to act in the client's interest.
How the adviser is paid affects the quality of the advice. A fee-only adviser charges the client directly, often a percentage of the assets managed or a flat fee.
A commission-based adviser is paid by the product provider when a product is sold, which creates a conflict of interest that should be disclosed. For businesses, investment advice arises in company pension plans, treasury management and employee share schemes.
Directors who rely on external advice should check the adviser's credentials, understand how they are paid and keep a record of the advice received. Relying on qualified advice can also help show that directors acted prudently.
Technology has added robo-advice, where software builds and rebalances a portfolio based on a questionnaire. These services typically charge lower fees than human advisers, although they offer less personal discussion of complex situations.
In practice
Real-world examples.
Example
A 45-year-old marketing manager asks a financial planner whether to put a $60,000 bonus into her pension or pay down her mortgage. The planner reviews her tax position and goals, then recommends a split. This is personalised investment advice and the planner must put her interests first.
Example
A small manufacturing company's board asks an external adviser to recommend where to invest $2,000,000 of surplus cash for two years. The adviser compares deposits, short-term government bonds and money market funds, and recommends a mix. The board minutes record the advice and the reasons for following it.
Example
A newsletter publishes a general article explaining how index funds work and what an expense ratio is, without referring to any reader's circumstances. This is education, not advice, and the publisher adds a notice saying so.
Formula
Calculation
Annual advisory fee = assets under management x fee percentage
A client has $500,000 invested with an adviser who charges 1% a year. The annual fee is 500,000 x 0.01 = $5,000, or $1,250 per quarter if billed quarterly. If the same portfolio were managed by a robo-adviser charging 0.25%, the fee would be 500,000 x 0.0025 = $1,250 a year. The difference of 5,000 - 1,250 = $3,750 a year is the price of the human guidance, and the client must decide whether it is worth it.Case study
Seen in the real world.
Marlowe Dental Group is an illustrative, fictional business whose owner received an unexpected $400,000 from selling a minority stake. A friend recommended a single high-yield product that paid its seller a large commission, and the owner nearly committed the full amount.
Before signing, the owner asked a fee-only planner to review it. The planner pointed out that the product's fees were high, that it concentrated all the money in one issuer, and that it did not suit the owner's plan to buy new equipment within three years.
The owner instead split the money between short-term bonds and a diversified fund, paying the planner a flat fee of $2,500. The illustrative lesson is that how an adviser is paid shapes what gets recommended.
Watch out
Common mistakes.
- Assuming anyone who talks confidently about investments is qualified to give advice, when the adviser should be registered or licensed where the law requires it.
- Ignoring how the adviser is paid, when commissions and product fees can bias recommendations.
- Treating general market commentary as personal advice, when it was written for a wide audience and ignores your circumstances.
Questions
People also ask.
How can I check whether an adviser is registered?
Search the public register kept by the financial regulator in your country, which normally lists the adviser's status and any disciplinary history.
What is the difference between advice and execution-only service?
With advice you receive a personal recommendation, while execution-only means you decide for yourself and the firm simply carries out the trade.
Does a fee-only adviser always give better advice?
Not automatically, but removing commissions reduces one conflict of interest, so the recommendations are less likely to be steered by product sales.
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