Investment Advice – Investment Advice DefinedInvestment advice is any recommendation or guidance that attempts to educate, inform, or guide an investor regarding a particular investment product or series of products. Investment advice can be professional—that is, the investor pays a fee in exchange for the qualified professional’s guidance and expertise, as seen with financial planners—or it can be amateur, as with certain internet blogs, chat rooms or even conversations.
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Breaking Down Investment Advice
Investment advice refers to any recommendations regarding an investor’s portfolio. Many professionals, including financial planners, bankers, and brokers, can provide investors with investment advice that is specific to their financial situation and short- and long-term financial goals. Due to the vast amount of investment advice available, particularly online, an investor may wish to determine the qualifications of the person dispensing the advice before making any investments. Entities that provide information for reference sake about the financial markets or specific assets might make an effort to clarify that they are not representing the information specifically as investment advice. Ultimately, it is up to the individual investor to decide which investments are most suitable.
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The Liabilities That Come with Offering Investment Advice
Given the influence and potential repercussions that investment advice may have, professionals who might be in a position to provide such input are often cautioned about the potential effect they may have. Whether it is a bank or an independent financial advisor, there may be certain requirements that must be adhered to when offering investment advice. This can include gathering sufficient information about the client’s financial standing and their needs.
There can also be requirements for understanding the nature of the investment advice being offered and how it relates to the client. Those who offer investment advice might also need to prove that there is no conflict of interest in the guidance they present. This can be particularly crucial if there is a sudden downturn in an industry, market, trading asset that an advisor recommended investors to put their funding towards. If the source of investment advice does not fulfill such duties, they may be held responsible for certain damages the investor sustained based on their guidance.
Under fiduciary requirements of the Employee Retirement Income Security Act(ERISA), other types of professionals, such as estate-planning attorneys, might find themselves in instances where they could be held liable should they offer guidance that could be constituted as investment advice. Under ERISA, an individual may be considered a fiduciary if they offer investment advice for a fee or other compensation, whether the compensation is direct or indirect. This includes advice given in relation to 401(k) and other employer-backed benefit programs.
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