The State Of Advice Today

Having access to sound financial and investment advice has always served as an advantage for those who seek it against those who don't. In times past sound, unbiased financial advice was a rare commodity. Today, formal and professional financial advice is a lot more freely available. But the prevalence of electronic and social media has meant that a lot of informal financial advice is also available. Informal advice also involves costs that are negligible or even non existent compared to formal financial advice.

This has seen most individuals display a shift in preference in favour of informal sources of financial advice. This is understandable, since informal advice is apparently of the same quality as formal advice. It also does not involve the costs associated with formal advice. With this being the current context in the advisory space, which form of advice should individuals depend on to meet their advisory needs? Will formal advice lose relevance to its informal counterparts in the years to come? These are the questions that I will attempt to answer today.

Let me begin by explaining what formal and informal advice actually constitute. Formal advice simply represents any advice delivered by qualified financial advisors as part of an advisory engagement with their clients. It is delivered on a one on one basis, and the advice is tailor made to suit the needs and best interests of each client. Formal advice is stringently regulated by bodies such as SEBI in India and SEC (Securities Exchange Commission) in America for instance. So individuals leaning on formal advice can be reasonably assured of the quality of advice that is imparted to them.

But such advice usually involves a cost. This could take the form of a flat advisory fee, commission on the products sold to clients or a combination of the two. And therefore most individuals may prefer to lean on informal sources of financial advice. Informal advice would include opinions from friends and peers, content on blogs and YouTube channels and opinions of financial influencers on various social media platforms. Informal advice is more easily accessible and widely available compared to formal sources of advice. They also do not involve the associated costs.

But the apparent advantages offered by informal sources of financial advice are actually its biggest disadvantages. The ease of access to informal advice and its wide variety ultimately means that individuals recieve more information than they can handle. They would have no way in which to filter out the information they recieve and focus on the kind of information that actually matters to them. This ultimately ends up causing greater confusion in the minds of those who depend on informal advice rather than helping them out. The quality of financial and investment decisions made on the back of this would naturally be poor.

Also, we must realise that financial advice available through informal sources is targeted at a much wider audience. Therefore, informal advice is usually highly generalised in nature. But, in terms of our needs as individuals, any advice we receive must be specific and highly customised to suit the nuances of each of our financial situations.

For that matter, I would not classify the content I create and release here every week as formal financial advice. What I discuss here are merely overarching principles of investing and finance that are broadly applicable to a wider group of people. And my content here is strictly for informational and educational purposes only. When I work with my clients in a formal capacity, I use these broad principles as a base to judge which of these principles apply to a particular client, and to what extent. So there is a lot of professional judgement involved which cannot be put forth on an informal platform such as this one.

The ease of access to media platforms in today’s times means that almost anyone with a digital presence can open an account on a platform of their choice and release content related to finance and financial advice. But that does not necessarily mean that everyone who offers advice on media platforms is backed by the credentials to do so. Also, most financial content creators on media platforms tend to post content to engage people rather than educate them.

So, the majority of such content would have very little substance to it. Also, there is very little accountability with such forms of advice. In other words, there are next to no consequences for those who spread questionable content on such platforms. Naturally, the risk of bearing any losses suffered on the back of acting upon such content and advice would rest completely on our shoulders.

Any financial advice imparted without factual accuracy and accountability cannot be considered as such. Therefore, virtually all forms of informal financial advice must be acted upon at our own risk. This would remain true until all parties involved in the ecosystem of informal financial advice act more responsibly. Content creators must have a way in which to clearly state their competence and credentials across all forms of content that they create. They must create content that is realistic and responsible with the primary aim of educating those who consume it. Governments must bring in a strict policy that governs all forms of content (whether financial or otherwise) propogated on social media. Anyone who wishes to create and propogate financial content on media platforms must first prove their competence to do so. The responsibility would lie with financial regulators in terms of putting a system in place that would evaluate and filter aspiring creators of financial content. And finally, investors must learn to consume financial content on various media platforms responsibly. They must be fully aware of what to take in and filter out respectively.

In recent times, there have been a few online investment platforms that have popped up in an attempt to bridge the gap between formal and informal advice. These platforms are usually set up and run by qualified investment professionals in accordance with the applicable regulations.

The service costs involved with these platforms are also quite low. These platforms usually offer a few structured bundles of products and/or services. These bundles are usually curated by the professionals who run the platform. And each bundle is usually targeted at a particular group of investors with similar profiles.

But, such platforms predominantly have limited scope for interaction between those who subscribe to these platforms and those who run them. So there is a lack of personalisation in the offerings of these platforms, unlike working with a professional financial advisor on a one on one basis. Also, because these platforms only have structured offerings, they may not be able to meet the more nuanced needs of their subscribers and investors. So ultimately, online investment platforms are currently not adequately effective with regard to bridging the gap between formal and informal advice.

All of this points towards a single conclusion. Formal channels of financial advice are not in danger of losing relevance to informal channels any time soon. In fact on the contrary, formal advice actually gains more relevance than before. The quality of financial content created in the informal space needs to improve significantly. Regulators must regulate the informal space a lot more stringently. They must also look to set up educational courses and relevant competence checks for individual investors.

This would ensure that investors are adequately equipped to handle financial products and information. Until such time, the onus of doing most of these things in terms of imparting personalised financial advice, educating investors and warning them against fraudulent financial content would rest squarely with professional advisors. And that effectively means that formal advice would continue to remain relevant in times to come.

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Akshay Nayak

SEBI Registered Investment Advisor and Fee Only Financial Planner based in Bangalore, India. My stories ≠ advice. Email ID : akshayadv93@gmail.com