Many may wonder whether they should use an investment advisor or if they should simply invest on their own through more direct channels. This post will seek to give the pros and cons of both methods and show when one method might be better than the other. The aim is to go beyond the logical advantage of consulting with a person who has more knowledge in the subject. Are there any other advantages?
First of all it must be pointed out that there are many different types of investments and all have their different characteristics with respect to how they work, what risks they have and what potential returns they could produce. As a basic rule, the less complex the product the more one can invest on his own and use what is known as an Execution Only service. Basically this means that the investor simply uses an intermediary to execute his desired deal, without the intermediary giving any financial advice on the product in question.
From a legal perspective, financial advisors are only allowed to trade on an execution only basis when dealing in what are known as non-complex instruments. These are essentially investment products that are easy to understand, such as a direct bond, a UCITS Fund (as are many bond funds), a direct share or a bank account. When dealing with more complex products such as a derivative for which the price will depend upon the price of another instrument, then execution only cannot be used. So as an investor you can be rest assured that if you are unknowingly dealing in a complex instrument your financial advisor would point this out and would need to ask you certain questions to ascertain your capability of understanding the product, your financial situation and your risk appetite/invest objectives.
Would I save money by buying direct?
Not really. In Malta the usual practice is that clients are not charged for advice given and hence there is no direct cost involved if an investor would like to speak to an advisor before investing into a product. Furthermore, should a financial advisor give advice there are certain legal obligations relating to information gathering that such advisor would be bound to. Therefore, as an investor you can be more confident that you are making the right decision by investing into a product after speaking to an advisor since by doing so you would have more investor protection.
Are there any drawbacks to receiving advice?
As just pointed out, when an advisor gives financial advice, such advisor is more duty bound towards the investor. As a result the advisor would need to ask much more questions to attain more knowledge about the investor than when simply doing an execution only transaction. Therefore a drawback would be that it would take much more time and it would involve divulging much more information to the advisor when seeking advice. Questions would need to be asked about your income, your assets, your financial obligations and liabilities (example loans and their repayments). Further questions about your past investments and your knowledge in the particular product would also need to be made. Furthermore, the advisor would need to ascertain that your financial objections are in line with the product the advisor would be recommending to you.
Can I get information without getting advice?
Yes! Just because an investor has spoken to a financial advisor it does not mean that the investor has received financial advice. An advisor could have simply given information and not advice. Advice is something particular to an investor, it is based on the particular circumstances of the investor, it is a personal recommendation. If one simply asks an advisor for information on bond funds and the advisor explains 2 or 3 bond funds to the investor – that is not classified as advice. This means that the investor would not be required to give the advisor all his personal financial details, but it would also mean that the investor has less investor protection.
Therefore, as I described earlier, it all depends on the complexity of the product that the investor is seeking to invest in. If the investor simply wants to buy a Malta government bond which can easily be understood and is certain of his/her investment, then there is no need for financial advice. On the other hand, if the investor has a sum of money that he/she would like to be spread over many instruments and such investor also has different time horizons and objectives for his/her money – then at that point professional financial advice would be the best course of action. Even if the products recommended are non-complex products, the financial advisor would know how to use different products to meet different aims and cover different risks.
The Bottom Line
One has to keep in mind that his/her investments need to be considered as one whole portfolio and the overall performance of the entire portfolio should be considered. A professional investment advisor can take this holistic view only if he/she has as much knowledge as possible about the investor and hence it is important for investors seeking advice to give as much relevant information as possible to their advisor. Due to this last point it is very important to find a financial advisor that is experienced, knowledgeable, of good repute and that one trusts. Luckily there are many advisors in Malta that fit this profile. It is always important to ensure that whoever you decide to trust with your money is actually part of a licensed institution and is actually licensed himself/herself to give investment advice.
Happy Investing,
KD