What is investment advice? That’s a question most commonly asked by naive, new home buyers who have no idea what the process is. Simply put, investment advice is the advice that would be given to someone who is considering making such an investment. It’s not that important to the buyer, but it can make a huge difference to the person selling the mortgage.
There are many different types of advice you can receive on investing. From mutual fund investment advice to buying stock in your own company, most investors want to know what types of investments are out there. Broadly speaking, there are two types of investor: those who are professionals, who understand how to invest properly; and beginners, who don’t know what investments are best to make. Beginners need investment advice because they don’t have a clue what they’re doing. And this is where professionals come in. They know what investments are good for new investors, as well as what investments are dangerous.
So, when an insurance salesman or bank representative recommends you sell all your other investments to purchase their annuities, they’re really giving investment advice. The people offering this type of advice make a commission on the sale. This commission comes from the amount of money you’d save when you choose to purchase their annuities. Now, you might ask, “Why would I pay them anything to sell my annuities?” The answer is simple: they make money when you purchase their “gifts”.
A word of caution: before you even consider seeking professional financial advice about investing, you should educate yourself about the American law, and how the securities laws apply to you. Most people have a very narrow view of what a fiduciary is. According to the Securities and Exchange Commission (SEC), a fiduciary is an advisor that advises a client on a particular investment product. Advisors are not allowed to push any investment product. A common misconception is that an advisor can “sell you” a security or another investment and make a commission off of it.
However, a lawyer specializing in securities law may point out that this isn’t how the law works. Under the law, brokers cannot give any investment advice to a client. They can give general information about investing but cannot advise anyone to invest based upon the advice they have given. This is why Buffet’s speech mentioned earlier was so shocking.
It is simply not the job of an investment advisor to “push” stocks or any other investment in anybody’s portfolio. So if you ever find an advisor who is trying to “pressure” you into investing by offering stock recommendations, you need to know that this person is probably working for the brokerage firm that he works for, not for you. It’s always best to follow your own instincts, but for the most part you should let your stock market wisdom guide your own stock market investment advice.