The Money to Be Made Giving Investment Advice

As long as there are decisions to be made, there will always be people looking for advice. And as long as there are people looking for advice, there will be experts who can profit. These days, people all over the world make a living doling out financial and investment advice.

The complexity of our financial system has made understanding how to navigate it a headache. The rapid financialization of all aspects of our lives means there is much money to be made in investments, but understanding how to do so is time-consuming and dull enough that most people can’t be bothered. Finding trusted investment advice is the recommended course of action, but this is easier said than done.

Family members have money advice. Friends have financial advice. Even retail stores have investment advice. Think of all the times you’ve heard of a pricey leather jacket spoken of as a fashion investment or a magazine call a white t-shirt a staple, investment piece.

Solid financial planning involves a discussion of your earnings, your debts, and your financial goals. The current wisdom suggests that steadily saving your money and letting it sit idly in your account is foolish, that you should instead seek expert investment advice to make your money work for you, at a risk level you are comfortable with.

But deciding you want to invest your money is only the first step. Where do you start? What’s the difference between different kinds of investments? How much risk is involved? And how can I even trust the person I hire to give me investment advice?

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The Investment Advice Industry in the UK

Traditionally, investment advice for the everyday person was hard to come by. It was only profitable for investment advisers to service high-net-worth individuals. Personalized attention for middle and working class people with only a few thousand dollars to invest was not considered a profitable business model.

As a result, a majority of the population has been forgotten by major banks who do not bother to market certain financial products or investment advice to them. Many financial and investment advisers have typically demanded potential clients have a minimum amount of money to invest.

In the United Kingdom, shady financial advisers have sullied the investment advice industry by “mis-selling.” Funds or firms come up with different financial products, and in some cases offer a fee to advisers to recommend these products. That in and of itself is not the issue. The issue is when financial advisers recommend these products solely because of the commission instead of their belief in the value of the product.  

These dealings resulted in legislation which bans middlemen such as financial advisers from receiving a commission from funds. Now, investment advisers are required to charge explicit rates, which can be in the form of an hourly rate or a percentage of the money being handled.

Can Anybody Be an Investment Adviser?

When it comes to investment advisers, also known as financial advisers, there are specific rules and regulations. In the United Kingdom, there are independent and restricted advisers, and it’s important to know the difference between the two.

There are several financial products and options that are available. An independent investment adviser can offer all of them. A restricted adviser is only able to offer a limited range. Regardless, both types are authorized by the Financial Conduct Authority (FCA) and must meet the same requirements.

Investment Adviser

Image source: Big Stock

An independent financial adviser (also known as an IFA) can:

  • Offer a full range of retail products and services
  • Provide unrestricted and unbiased financial and investment advice
  • Help you consider products from across the market

A restricted financial adviser is usually affiliated with a particular provider and only recommends products or services from certain providers. This kind of investment adviser is required to disclose their status and the nature of their restriction to any clients. 

Investment Guidance versus Investment Advice

Individuals can also seek financial and investment guidance as opposed to advice. In this case, an investment adviser can present a person with a number of options and helpful information, but will not recommend a particular product or strategy. This can be helpful for people who are just seeking general information, but it also means they do not have an option for recourse if the “investment advice” they follow has a bad outcome.

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The Role of the Investment Adviser in the Information Age

The advent of the Internet revolutionized banking and the movement of money. We can now send money overseas with the click of a button. It has also changed the need for human brokers. Now we can transfer money online, pay bills online, and with the introduction of online trading accounts, we can invest online as well.

An online trading account, also known as an online brokerage account, is a way for individual investors to trade from the comfort of their computer. In the same way that online banking allows you to carry out transactions without visiting a branch, online trading accounts allow you to make investments without consulting a broker or investment adviser. 

If you’re just starting out in the world of investing, you may be hesitant to go it alone. In this case, investment advice or guidance may be a necessary first step to become comfortable. On the other hand, if you are confident in your financial knowledge and just need a medium through which you can carry out trades, an online trading account could be the way to go.

Online Trading Accounts Offer Speed, Convenience, and Independence

Online trading accounts have a number of benefits including convenience and independence from a broker or financial adviser. As an individual investor, you are free to follow your own investment advice. In addition, online brokerage accounts mean fewer paper statements that you have to file and keep track of.

There are several kinds of online accounts available. They range from simple to complex with fees to match. A few factors that speak to the sophistication (and price) of online trading accounts are:

  • The speed with which orders are carried out
  • Analytical tools
  • Available variety of assets
  • User experience design or user friendliness

There are several brokers in the UK that offer online trading accounts or brokerage services. They include:

Hargreaves Lansdown’s Vantage Account

  • Allows users to consolidate all their investments in one account (i.e. shares, ISAs, SIPPS)
  • Easy to set up: after an anti-money laundering screening, you can deposit money and start investing

TD Direct Investing’s TD Trading Account

  • Investment management online and over the telephone
  • Trading on international markets
  • Investments can be transferred from another provider

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How Can Anyone Understand the Market Enough to Provide Stock Market Advice?

From childhood we’ve heard adults and important people on the news discuss the stock market so seriously that it seems entirely inaccessible and grown-up. At the end of the day, the stock market is a study in human emotion and money. Stock market advice isn’t just about understanding capital and business; it’s about understanding human behavior.

Stock Market Advice

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Some observers contend that the participants in the stock market have a tendency to overcomplicate things by selling and trading frenetically, when the best stock market advice is to just be patient. Others are terrified of being left standing when the music stops, and if they hear of a decline in a stock price start scurrying to sell their shares off, too.

Then you have the stock market advice perpetuated by legends like Warren Buffett who famously said to be “Fearful when others are greedy and greedy when others are fearful.” Instead of buying into the hype and purchasing stocks because everybody else is–or selling them off when they’re losing support–it’s better to do the opposite, according to the billionaire.

You could probably find varying opinions from a multitude of successful people. People have their own strategies when it comes to investing in the stock market, and while there can be informed stock market advice, guaranteed advice rarely exists (legally). This is also because humans dictate the behavior of stock prices.

Robo Advisors and the Advent of Computerized Trading

One way in which high-flying investors have found a method for acting faster than the stock market can react is by using advanced algorithms to advise and carry out their trades. Think of a super smart, stock market advice-giving machine that only people with the funds can access.

Instead of humans deciding where to invest money, it’s super computers that decide where money will be allocated. More precisely, algorithms figure out what the best investments are. Whereas a traditional investment adviser may charge you a percentage of your investment earnings, the management fee when a machine is handling things is next to nothing.

These computers take in a certain amount of information to determine your goals, needs, and risk level and then make decisions themselves. These aren’t just robo advisors. They’re robo traders as well.

People can carry out trades, purchases, and sales without a middleman. Trades with robo advisors happen in the space of milliseconds.

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Robo Advisors Provide Access to Investment Advice to People with Lower Income

Typically, access to investment advisers has been restricted to people with a certain amount of capital. The advent of robo advisers in the form of apps and online tools developed by the FinTech industry has opened up financial and investment advice to the everyday investor.

The United Kingdom’s Financial Conduct Authority has even supported the development of robo advisors in the UK, which it refers to as “automated advice models.” The report noted some unfortunate but not surprising statistics related to banking decisions made by consumers:

  • In 2014-15, two-thirds of financial products purchased by consumers were unadvised
  • 34% of consumers who bought a product unadvised later regretted the decision

These machines also remove the emotion involved in investing. A robot will not react impulsively by pulling out or going all in depending on what other investors are doing. Robo advisors in the UK have already started replacing human advisors. In March 2016, the Royal Bank of Scotland announced it would be cutting 550 jobs and replacing them with robo advisors.

Millennials Eager to Enter the World of Investments Through Robo Advisors

While older generations may have been hesitant to adopt online banking, younger generations grew up in a world where almost everything from buying books to interacting with peers is done online. That has made them more receptive to investing advice and stock advice provided through financial technology.

Millennials in the United Kingdom were ranked the most trusting millennials of robo advisors globally. US millennials came in second. This information is from the Legg Mason Global Asset Management 2016 Global Investment Study. According to the study, the numbers on millennials break down as follows:

  • 85% of UK millennials reported feeling comfortable with robo advisors
  • 70% of European millennials are comfortable with robo advice
  • 59% of millennials, on average, said they felt comfortable with the technology

It isn’t surprising that the tech industry has found a way to revolutionize the legacy systems of traditional banking. The low-cost portfolio management offered by such tools has opened the door to more sophisticated investment advice to a larger portion of the population, allowing consumers to make smarter decisions about their money.

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