Investment Advisor: who is it and why is it needed?

2.10.2022
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инвестиционная консультация

Do you have accumulated capital, but you don’t know what to do with it? Currently, many people are in a similar situation, and invest money in a bank deposit as a result, because they do not know any other more profitable alternative. As a rule, they are far from the securities market and have no idea that there are other financial instruments that can bring good income. An investment adviser will help you understand stocks, bonds, and other financial market instruments.

An investment adviser is a professional participant in the securities market who has the right to advise private investors. With its help, a person can choose the type of security, determine the amount of investment, as well as its terms. In simpler words, the investment adviser predicts the profitability of financial market instruments, and also warns about the risks that may arise.

An investment adviser can be either a company or a private entrepreneur. There is a central bank register of investment advisors maintained by the National bank of the country. If a company or individual is not listed on this list, they are not allowed to provide investors with personal investment recommendations.

The work of investment advisors is regulated:

  • the Law “On the Securities Market;
  • requirements of the national bank of the country for this type of activity;
  • basic standards.

All of the above documents specify what data should be included in investment recommendations, and in what form the adviser should give them to investors. However, this is not all the nuances.

investment advice

In addition to investment advisors, financial consultants work on the market. A financial advisor helps you resolve issues related to your personal budget. How to understand? A financial adviser can:

  • plan a family budget;
  • choose the best bank deposit;
  • find a profitable bank loan;
  • choose a life insurance policy;
  • create a retirement plan;
  • give detailed advice about banks;
  • provide investment advice.

What is the difference between a financial adviser and an investment adviser? The latter can give advice on issues related to finance, but they will only be responsible to the law for recommendations that relate to investments in securities and derivative investments. This means that you should not rely entirely on our expert Advisors for other issues, but independently assess the possible consequences and make a decision.

How much does a financial investment adviser cost?

As a rule, large brokers and trust managers charge a certain percentage for investment advice, on average it is 0.1-0.2% of the investment size. Sometimes they are provided absolutely free of charge with the condition that you open an account with their company with a certain amount of money. This way they get new customers. When a person starts using recommendations, transactions will be made through the account, from which brokers and managers will withdraw good commissions.

Some private investment advisors can also provide free recommendations. It should be understood that they promote the products of financial companies and receive a certain reward for this. What does it mean? An investment adviser can promote the bank’s structural bonds. The law does not prohibit advertising specific financial instruments, but in these cases, the adviser must inform the investor that he receives a commission for promoting the “product”.

An investment adviser is

Private investment advisors usually charge money for their work. Some offer a fixed price for one consultation, others can set a monthly or hourly fee, and others agree to a percentage of the total investment. The cost of the service generally depends on the complexity of the investment consultation. Let’s look at what this will look like with an example.

The investment adviser has suggested the usual conservative strategy, which is accompanied by minimal risk. The essence of the strategy is to buy reliable corporate bonds. For such a one-time consultation, they can charge a fee of $ 140-400. If you want to take a risk and build a portfolio of promising shares of companies in the information sector, the expert Advisor will charge a higher fee, since it will take longer to make a recommendation. Therefore, before contacting a specialist, calculate the return on investment adviser services, in particular, whether it will cover the future profit from the investment.

How do I choose an investment adviser?

First of all, check whether the adviser is listed in the official register of the state bank. In addition, such a specialist must be a member of one of the SROs, among them::

  • National Association of Stock Market Participants;
  • National Financial Association;
  • Association of International Investment Consultants and Advisors.

The SRO website contains a list of advisors and their contacts. Then compare the cost of services and find reviews about the work of Expert Advisors on the Internet. Do not rush to sign an investment advice agreement. Be sure to study its contents.

How does the advisor make recommendations on securities?

investment consultants

Before giving advice, the specialist will be engaged in drawing up your personal investment portfolio. It will contain the following information::

  • investment amount;
  • terms of investment;
  • planned return on investment;
  • the amount of maximum losses that the investor is willing to incur.

The investor advisor is also interested in the investor’s age, education, experience in investment activities, average monthly income and expenses for the last calendar year, total savings, loans and borrowings. All this information is necessary so that the Expert Advisor can understand what risk you can incur. All data that you provide to the Expert Advisor will remain only between you, since it is protected by the law on personal data.

When the investment portfolio is fully completed, it will need to be approved. Before signing, make sure that all your data is filled in correctly. After signing the document, the Expert Advisor will make a recommendation on where best to invest your money. As a rule, the expert Advisor does not check the accuracy of the data that you gave him, but it is in your best interest to tell him the truth, otherwise the advice will not benefit, but rather harm.

Example: You have informed the consultant that you have $ 25,000 in savings, little experience in the stock market, and are ready to take any risk. The advisor has formulated an aggressive investment portfolio, and you have approved it. The consultant advised you to invest $ 2,700 in shares of new companies, and you took advantage of this recommendation. All the information you gave is incorrect.

In fact, you do not have such savings, $ 25,000 is all that you have accumulated and invested in very risky stocks. After some time, the shares fell in price, leaving you without earnings and a significant part of your savings. Who can I blame? Of course, myself. If you were to tell a personal investment adviser that $ 25,000 is your entire asset and that you have no experience or knowledge in investing, they would draw up a conservative investment portfolio for you and advise you on less risky securities.

The more money you have available, the more different financial market instruments you will be able to use. A financial adviser will determine which securities have a high or low level of risk, and select those that will fit your investment portfolio.

Who do investment consultants work with?

an investment adviser is

Expert Advisors work with both experienced and novice investors. Therefore, if you do not have securities and investment experience, but would like to try your hand at this business, the expert Advisor will offer you tools that are suitable for beginners. As a rule, they are not so complicated and have minimal risks. These are usually high-rated government or corporate bonds. The yield on them is not as high as we would like, but it is known in advance.

If you have already invested some of your capital in securities and want to add something new to it, the Expert Advisor will evaluate your portfolio and make recommendations that will help smooth out the level of risk and return on the portfolio, as well as suggest new tools for it. These may include shares of new companies, mutual funds, or ETFs. The return on such investments is unpredictable, but it is often higher than what bonds can give.

If you consider yourself an experienced investor, the Expert Advisor will give you a recommendation with more complex tools. These are usually structured products that include options and futures. Despite the fact that the risk of losing money is quite high, there is also a chance to make a good profit even if other stocks fall.

The most important thing in this case is to choose the right investment adviser. Also, keep in mind that you can only use free money to invest. Before investing in securities, create a financial safety net.

What is included in the investment consultation?

investment recommendations

In the recommendation, the Expert Advisor usually indicates:

  • type and quantity of certain securities or other financial instruments;
  • approximate transaction amount;
  • investment term;
  • recommendation validity period;
  • place where the transaction was made.

For example, you can save up another $ 25,000 that you want to spend on investments. The return you expect is 25% per year, while allowing for a maximum investment loss of $ 275. The investment adviser will make a recommendation, the essence of which is to invest $ 137 in bonds of a new company with a yield of 35%, and spend the remaining amount on bonds of reliable companies.

Possible investment risks will be specified in the recommendation, contract, or website of the Expert Advisor. It looks like a general warning that investments can lead to loss of money, in some cases the risks are described in more detail.

For example, an Expert Advisor may recommend buying oil company securities and warn you that you may lose up to 80% of your investment. Since the value of shares depends entirely on oil prices. This means that if the price of oil falls, then the stock price will also fall.

The adviser can set out information about a conflict of interest in a recommendation or provide it in a separate document. As we said earlier, if an investor receives a reward from certain companies, he must inform the investor about it.

Both the Expert Advisor and one of its clients can benefit from recommendations. There are cases when the Expert Advisor makes recommendations only for specific securities and derivatives of financial instruments. They should notify the investor about this in advance. The Expert Advisor should also inform you about the fees and other expenses that you will need to pay to brokers when buying / selling financial instruments.

The investment consultant’s recommendation can be in electronic or paper format, and it can also be recorded on a voice recorder. The type of recommendation is specified in the contract.

What information the recommendation should contain is specified in the state Bank’s requirements for the activities of investment consultants and the basic standard of their work.

How do I use a recommendation from a bank advisor?

investment consultant

You should be aware that the implementation of the recommendation is optional. If you think that the Expert Advisor suggested too risky options, then it is better to immediately abandon them or ask them to develop a more conservative option.

If you have 100% confidence in your Expert Advisor and decide to act according to the recommendation, you will need to follow exactly all its points. What does it mean?

Let’s say that in early May, the Expert Advisor suggested that you buy shares of an IT developer in the near future, because it was reported that he would release a new software product in the summer. However, at this time, you urgently needed to make repairs, and you spent the money set aside for investment. You were able to accumulate this amount six months later and bought shares of this company only in September. By this time, the shares have grown significantly in price, so you could not earn serious money on them.

Today, many investment advisors not only give recommendations, but can also purchase securities or PFI on your behalf. As a rule, such actions can be performed by a licensed broker Expert Advisor. The investor has the right to choose a broker.

As we have already mentioned, invest advisors act strictly in accordance with the investor’s interests and are responsible for making recommendations. If the Expert Advisor made a mistake or intentionally led you on the wrong path, which eventually led to losses, the investor has the right to demand compensation in court. However, in this case, the claim can only relate to investments in securities and PFI that you made on the recommendation of the Expert Advisor. If they made a mistake in choosing another product, you will no longer be able to claim compensation for losses.

Losses are not always the fault of the Expert Advisor. Often, losses are obtained due to the fact that you provide incorrect information about yourself or do not accurately follow the recommendations of the Expert Advisor. In cases where the adviser performed his work flawlessly, it is useless to make claims, since the court will take his side.

Investments in the stock market in any case are associated with losses. If the expert Advisor has told you about them, then all responsibility for the decisions made is assigned to you.

For example, the expert Advisor suggested that you invest in shares of oil companies, explaining that oil prices are rising, and with them the value of shares. But he immediately warned that the situation could change at any time. You followed the recommendation and bought the stock, but after a certain amount of time, oil prices fell and the stock price dropped significantly. It is useless to claim damages from the Expert Advisor, because it warned you about the existence of risks.

However, there are cases when claims against the Expert Advisor are not groundless. For example, you did not want to expose your savings to strong risks, and you initially informed the adviser about this in your investment portfolio. The Expert Advisor made you believe that the shares of new companies are a promising investment, and as a result, you suffered big losses. It turns out that the expert Advisor forced you to buy something from which it will benefit, and not you. If they did not inform you that they work with this company, this may be the basis for a claim. In a situation where you have been informed of a conflict of interest, responsibility for decisions passes to you.

To make it more clear, consider the following example. The investment adviser advised you to purchase structural bonds of a certain bank, but did not inform you that he receives remuneration from it for the implementation of its structural products. If you receive damages, you can claim compensation.

You can also file a complaint against the investment adviser with the SRO where it is registered, and with the national bank. In this case, the investment adviser will be issued an order, fined or excluded from the list of SROs and the regulator’s register. However, all this will bring you only moral satisfaction, since the SRO and the state bank cannot oblige the consultant to compensate for losses, this can only be done by the court.

To reduce risks when working with an investment adviser, carefully and seriously consider their choice. In the event that you consider the expert’s recommendations too risky, you should not blindly follow them, but rather ask them to review the financial instruments and the recommendation as a whole.

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