Solving The Advisory Conundrum
When we seek advice of any kind on our financial matters, there are two predominant terms that occupy the lion's share of our mindspace. These terms being financial advice and investment advice. In fact, the two terms get used so often and so liberally that the overriding perception among individuals today is that financial advice and investment advice are one and the same. But in truth, there is a significant difference between the meanings of these two terms. And understanding the essential differences between these two terms is vital to us being able to understand what kind of advice we need and working with the right kind of advisory professionals to suit our needs. Therefore in today's post I'm going to decode all of these aspects right from what financial advice and investment advice means, what each of them involves and matching whether we need financial advice or investment advice in light of our individual needs.
Let us first fully understand the concepts of financial advice and investment advice. Financial advice is advice related to money on a broader overarching level. It extends to all major areas of our finances and is a lot more strategic in nature. Competent financial advice would provide us with a set of clear principles which we can then use to create a stable foundation for our finances. Seeking out and acting on financial advice would therefore instill a sense of consistency and discipline in us with regard to the way we manage our money. It covers areas such as setting financial goals based on our aspirations, how much we need to save and invest every month, cashflow management, budgeting, estimating insurance needs, estate planning, behavioural aspects related to investing and money management and so on. Imparting financial advice effectively therefore requires advisors to be aware of clients' levels of knowledge regarding concepts of investing and personal finance and educate them appropriately to fill any gaps. They must then help clients build discipline to exhibit the right financial behaviour over long periods of time.
Investment advice on the other hand deals with the management of a set of investment assets that an individual possesses, in light of the financial goals that they may aspire to achieve. While financial advice is a lot more broad based and strategic in nature, investment advice is a lot more specific. It deals with aspects such as assessing and understanding the risk profile of the individual, designing an asset allocation strategy in light of their financial goals, and recommending and managing investment products which give the individual the best chance to achieve to achieve those goals. In other words, if financial advice gives us a set of principles and a platform to manage our money, investment advice helps us identify ideal avenues through which we can put those principles into practice and build something meaningful on the platform we have created. Investment advice should therefore be viewed as an individual component within the wider ambit of financial advice rather than as a distinct standalone concept. To impart investment advice effectively, advisors must have the right set of analytical and technical skills to be able to understand how various investment products work, so that they create a framework for their clients' investments and choose the products that are the right fit within that framework, in light of their financial goals and risk profiles.
Let us now understand when we need financial advice and when we need investment advice. The need for either of the two depends on the point of time at which they become relevant to us. Financial advice is relevant to anyone who wants to manage their finances effectively, regardless of the amounts involved. Therefore we would need financial advice right from the time we first gain access to a steady source of income. And the need for financial advice would last all through our lives. So the ideal time to seek financial advice would be the moment we have a secure job and a stable monthly income. And during the initial years, we would need someone who would help us set up the right systems for our money, put them into motion and regularly review and evaluate our progress. Not someone who would give us recommendations with regard to the best products to invest in. Therefore, a financial advisor would be the professional we need to go to for help. The kind of financial advice we need in the early years of our careers would be advice that is simple and can be implemented consistently over a period of time. This would include advice on aspects such as understanding and deciding on our major financial goals, developing the discipline of saving every month, avoiding debt and maintaining a clean credit history to name a few. Sound financial advice would again be required towards the fag end of our lives when it is time to administer the wealth we may have accumulated over the years. But any financial advice we receive at this point of time must mainly be inclined towards estate planning, most commonly effected through well organised documentation of investments and other financial details, creating a trust or preparing a legally enforceable will, and appointing executors to handle the wealth transmission process.
Investment advice on the other hand, becomes most relevant to us during the middle phase of our lives and careers. Adopting the right financial behaviour during the early years of our careers usually means that we would have clarity regarding our financial goals and also built up a reasonable corpus by the time we are in our early to mid 30s. At this point of time we would need a concrete plan for our investments, that allows us to diversify and channel them towards our financial goals effectively. This is where sound investment advice from a competent investment advisor would help us in terms of understanding our individual risk profiles, deciding on an asset allocation strategy, recommending the right investment products for our needs and goals and helping us figure out the tax implications that come with them. Post retirement, the role of investment advice would be limited to helping us segregate and organise various investment products in our portfolios so as to enable us to meet our financial needs during various stages of their post retirement lives. Therefore, the central goal of investment advice must always be to help us choose the right investment products given our risk profile, align them to the goals our goals and ensure that the products chosen enable us to meet our financial goals at the right time. The essential difference between financial advice and investment advice is summed up in the graphic below, where the financial advisor represents financial advice and the portfolio manager represents investment advice.
This leads to the question as to how to meet our advisory needs. The best case scenario would be to work with advisors who offer comprehensive financial planning services for a flat annual fee, since such advisors are more likely to be equally 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. The next best option would be to work with a team of two like minded professionals, each proficient at imparting one form of advice among the two. Here are some questions that are worth asking our potential financial advisors before hiring them, to ensure that they are a right fit for us.
The key takeaways from this post should be that financial advice and investment advice are interlinked, yet completely different and distinct from each other. Each form of advice deals with a definite set of aspects connected to our finances and become relevant to us at different points of time. 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, but working with a team of like minded advisory professionals is also a perfectly viable option. Approaching various aspects of the advisory conundrum in this way would provide the best solution to it, and allow us to get the most relevant form of advice, from the right people, at the right cost and at the right time. And this ultimately makes all the difference between us tasting success with our money or missing out on it.