What is Investment Advice and Investment Guidance?
Faisal Sheikh
25 years: Wealth and risk management specialist
In this video, Faisal explains investment advice in more detail in a wealth management context by exploring the difference between "investment advice" and "investment guidance." He also takes us through some specific regulatory requirements that those providing clients with investment advice are subject to and how these have been impacted by the 2018 changes made to regulation.
In this video, Faisal explains investment advice in more detail in a wealth management context by exploring the difference between "investment advice" and "investment guidance." He also takes us through some specific regulatory requirements that those providing clients with investment advice are subject to and how these have been impacted by the 2018 changes made to regulation.
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What is Investment Advice and Investment Guidance?
5 mins 58 secs
Although the term “advice” is used extensively within the financial industry, in the Wealth Management industry it is important to distinguish between what is considered “Investment Advice” versus mere “Guidance”. Investment advice is a personal recommendation of what a registered advisor thinks a client should do when weighing up their investment options, whereas investment guidance is more general information about financial products. It is essential to understand the specific regulatory requirements that apply to investment advice and specifically those introduced through MiFID II, including the client suitability and appropriateness tests.
Key learning objectives:
Understand the key differences between Investment Advice and Investment Guidance
Understand MiFID II Investment Advice Requirements and when do they apply
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What is the difference between investment advice and guidance?
Investment advice is a personal recommendation of what a registered advisor thinks a client should do when weighing up their investment options, whereas investment guidance is more general information about financial products. As advice is specific and actually tells the client what to do, any recommendation that the advisor offers are subject to the following conditions:
- The recommendation is suitable for and personal to the client
- It will be based on the clients’ specific circumstances, investment goals and financial objectives
- In the UK, only an FCA-regulated firm can provide this kind of advice
What are the MiFID II Investment Advice Requirements?
Investment advice is regulated by the Markets in Financial Instruments Directive (MiFID II), specifically through a section called the ‘Client Suitability and Appropriateness framework’
MiFID II introduced requirements for Investor protection which are as follows:
- Aligning certain asset classes and Market Infrastructure to reduce Investor risk
- Mandating firms to provide more detailed information to Investors on costs and charges ie commissions charged
- To evaluate the client for suitability and appropriateness when providing investment advice or execution-only service
- To determine that the investment advice is being provided on an independent basis
- When firms cater to the role of providing investment advice to their clients or managing clients’ investment portfolios, it becomes the investment firms’ responsibility to extract the requisite information from the client so that a suitable recommendation can be made to the client
How do wealth managers evaluate the suitability and appropriateness of investments for clients?
A deep understanding of the financial situation of clients is essential, this includes investment knowledge, experience and investment objectives. This insight requires frequent interaction with clients to ask them for information, including career history or trading experience.
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Faisal Sheikh
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