Financial Advice Vs Investment Advice : What's The Difference?

With regard to advice on money matters, there are two terms that are widely used. These are financial advice and investment advice. They are used liberally and often interchangeably. This creates the perception that financial advice and investment advice are the same. But there is a significant difference between the two. Understanding the essential differences between these two terms is vital. It would help us understand what kind of advice we need. It would help us identify right advisors to suit our needs. Therefore in today's post I will be explaining both these terms in detail. I will also be highlighting the key differences between the two.

What Is Financial Advice?

The term financial advice refers to advice related to money on an overarching level. It entails strategic advice that extends to all major areas of our finances. Pragmatic financial advice provides us a set of clear principles which help create a lasting structure for our finances. It covers areas such as setting financial goals, cashflow management, budgeting, estimating insurance needs, estate planning, investment behaviour and so on. Implementing financial advice would instill consistency and discipline in our money management.

What Is Investment Advice?

Investment advice deals mainly with the management of investment portfolios in light of an individual's goals. This makes investment advice more specific in nature. It involves assessing and understanding risk profiles, designing asset allocation strategies, as well as recommending and managing investment products. This is done to give individuals the best chance to achieve their goals. In other words, investment advice helps us identify ideal avenues through which we can implement financial advice. Investment advice should therefore be viewed as a part of financial advice.

When Are Each Of These Required?

Financial advice is relevant to anyone who wants to manage their finances effectively. It remains relevant regardless of the age of the individual or the amount of money involved. Therefore we would need financial advice the moment we have a secure job and stable income. And it would last all through our lives. During the initial years, we may need help to set up, operationalise and review pragmatic systems for our money. We typically need simple actionable advice during the early years of our careers. This would include advice on aspects such as defining our major financial goals, developing financial discipline, and avoiding debt. Sound financial advice would again be required towards the fag end of our lives. The goal then is usually to administer our accumulated wealth. It would therefore typically be inclined towards estate planning.

Investment advice is generally most relevant to us during the middle phase of our lives and careers. By then we are likely to have clarity regarding our financial goals and a reasonable corpus available. At this point we would need a concrete plan for our investments. This is where pragmatic investment advice would help us. It is likely to give us clarity on our risk profiles, appropriate asset allocation strategies, the right investment products for our needs and goals and tax optimisation. Post retirement, the role of investment advice would be to help us organise various investment products in our portfolios. It would also help us manage portfolio withdrawals post retirement.

Meeting Advisory Needs

The best case scenario is to work with advisors are proficient at imparting both financial and investment advice. They would be able to alternate between either of the two, depending on the needs of the individual client over the course of the engagement. It would be prudent to work with professionals who :

1. Provide advice that encompasses all aspects of our finances

2. Get paid solely by us for the amount of time and effort spent on our case

3. Charge a fixed and highly transparent annual fee (preferably a flat rupee amount) for their services

Parting Thoughts

Financial advice and investment advice are interlinked, yet completely distinct. They each deal with a definite set of aspects connected to our finances. Therefore, we would need to rely on both forms of advice over the course of our lives, once we have a steady income. Having our advisory needs met through a single professional would be ideal. Approaching our advisory needs this way would allow us to get appropriate advice, from the appropriate entity, at an appropriate cost and at right time.