Investment Advice: What It Is and How It Works
Investment advice from an expert can be a great way to protect your assets and grow your wealth. But where do you find investment advisors? And how do you know which one is right for your needs?
I’ll answer those questions and more in this article, helping you understand what investment advice is, how it works, and the different types of investments available so that you can make informed decisions about who to take advice from.
What is investment advice?
Investment advice is professional guidance about what types of investments to buy, sell or hold. Experts can also provide personalized investment plans and portfolio management services for investors who have a high net worth.
The service may be provided in person, over the phone, or by email correspondence (although advisors will give more personal attention when meeting in-person) and is typically paid for by the hour, a flat fee or as a percentage of assets.
Most financial institutions offer investment advice to their clients; some do it on an in-house basis while others rely on outside companies that specialize in this service.
Investors can also find advisors through independent organizations like Certified Financial Board, which requires its members to pass a test and meet minimum education standards.
How does investment advice work?
Investment advice providers work with clients to assess their personal goals and then develop an investment plan that will help them reach those objectives. They can also provide assistance in deciding which investments are appropriate for a client’s risk tolerance, time horizon, experience level and financial position.
For example, if you want to invest $100,000 to support your living expenses in retirement, an advisor might suggest a portfolio that includes stocks, bonds and mutual funds.
Saving for education? The adviser may recommend you invest in high-yield savings accounts or certificates of deposit (CDs) because these investments are low risk but offer higher returns than cash-equivalent investment options such as savings accounts.
An advisor might also offer you advice on other financial matters such as retirement, estate planning or tax-saving strategies. They can work with clients to figure out their current investment mix in order to improve performance and diversify risk.
What are the types of investments?
Investments are typically grouped into three categories: stocks, bonds and cash equivalents. Each type of investment has advantages and disadvantages; the goal is to find a mix that works best for you based on your risk tolerance, time horizon (how long until you need to withdraw money from an account) and financial position (the current assets in your portfolio).
Stocks are the most volatile of investing options. They offer a chance for investors to make significant gains, but also carry more risk than bonds or cash equivalents like certificates of deposits (CDs).
Bonds represent debt that companies and governments have issued in order to raise funds from savers. The returns on these investments depend on how many years are left to maturity, the credit quality of the issuer and prevailing interest rates.
Cash equivalents include savings accounts, money market funds (which invest in short-term debt securities) and certificates of deposit (CDs), which represent a loan from an individual or organization for a specific period of time with agreed-upon terms. The principal is guaranteed by the issuer, but there is a trade-off in terms of higher risk and lower returns.
Other investments can include real estate, commodities and privately-held equity.
The best investment mix depends on your personal goals based on things like time horizon, financial position and risk tolerance. There are no simple answers for figuring out what’s right for you because everyone has different needs when it comes to investing; it’s up to the investor and investment advisor to decide on a plan together.
What are the 5 stages of investing?
Investment is a process that typically includes five stages:
- Evaluating your current finances to gain an understanding of what you have and how much risk you’re willing and able to take. This stage also entails identifying personal financial goals such as retirement, college tuition or paying off debt. Once these are clarified, the next step is developing an investment plan.
- Determining your risk tolerance and time horizon, which will help the investor figure out what type of investments they should be making. The longer someone has until retirement or college enrollment for example, the higher their portfolio can be in stocks as opposed to bonds; if someone wants a more conservative approach, then they’ll invest in more bonds and less stocks.
- Choosing an investment advisor to work with, who will help you manage your investments for a fee.
- Monitoring how the portfolio is doing over time; rebalancing when needed such as after significant market fluctuations or major life events like marriage, divorce, childbirth or loss of a job.
- Reaching your financial goals by continuing to contribute to the portfolio as needed and gradually increasing an investment’s risk over time in order to get closer to retirement age or college enrollment date.
Who can give investment advice?
There are two basic types of advisors:
- Financial institutions that offer investment advice to their clients on an in-house basis.
- Independent financial advisors, who can be consultants or work at a brokerage firm. Some brokers specialize in insurance, tax planning and retirement advice while others focus on investments for all stages of life. Independent planners may charge a fee for their services in the form of commissions or retainers.
Investment advisors are typically certified by one of three governing organizations: The Certified Financial Board, which requires its members to pass a test and meet minimum education standards; the Investment Management Consultants Association (IMCA), which certifies financial planners who have at least five years experience and a bachelor’s degree; and the CFA Institute, which certifies investment professionals who have at least three years of experience and a bachelor’s degree in finance or economics.
There are also some online programs, such as Fast Fortune Club, that offer investment advice to members. I Buy I Review recently reviewed Fast Fortune Club. You can find the Fast Fortune Club review here.
What is the importance of investment advice?
An investment advisor can help people who are unsure of what to do with their money. With a professional managing your investments, it’s possible that you end up saving more and earning more than if you did nothing at all.
Investment advice is especially important for those just starting out in the world of investing because they may not have the knowledge and experience to figure out what’s best for them.
A professional is also in a better position:
- To help individuals meet their investment goals, which could be as big or small as making enough money to cover college tuition or saving up for retirement; they can provide guidance on the type of investments that will allow people to meet their goals.
- To provide investment advice in the form of guidance, education or mentoring to help people decide when and how much they should invest over time.
Investment advisors also have a duty to give legal, tax and fiduciary advice for the client’s benefit; this is why some financial planners charge fees.
How do you choose an investing advice provider?
Choosing an investment advisor is a personal decision that depends on the needs and preferences of each individual.
The first step to finding one is to know what you’re looking for in an advisor:
- Do they specialize in certain types of investments, such as stocks or bonds?
- How much do they charge for their services?
- Do they provide financial planning for things like retirement or marriage, as well as just investment advice?
- What are their qualifications and experience level?
Once you have a general idea of what type of advisor to look for, start reaching out to different advisors until you find one that suits your needs best.
Next, you’ll want to find out about the advisor’s background and credentials. For instance, are they an independent financial adviser or affiliated with a company that offers investments?
If working with a brokerage firm, what is their expertise in terms of investment type, retirement planning and other areas like estate planning?
Lastly – as with any professional relationship – it’s important to speak with different advisors and ask questions that are relevant to your specific situation.
Investment tips for beginners
Some investment tips for beginners are:
- Start with a smaller amount of money. Investing small amounts, like $25 or $50 at a time each month in an index fund, is usually the best way to build wealth over time because it offers diversification and cost efficiency while limiting risk.
- Have patience. One of the hardest things for beginners is that the rewards of investing don’t happen overnight.
- Look for low fees: For example, if you invest in an index fund with a management fee of 0.05%, it will be more than double the cost when compared to one that charges just 0.03%.
- Invest in what you know. Investments can be anything from stocks to real estate and more, so it’s important to understand the underlying asset that you are investing in before buying shares or contracts of any type.
- Learn about different types of investments – like index funds, ETFs and stocks – and which ones are best for their specific goals.
- Take advantage of free online resources to learn more about investing, like the wealthsimple blog or websites like indexfunds.com and investopedia.com that provide in depth information on different types of investments.
- Get rid of debt: Debt is one way to lose money because it costs you interest. With interest rates being so low, it can be tempting to want to borrow money in order to invest.
- Ask questions: Asking for investment advice about the type of investments they should buy and how much risk is appropriate for their goals will help them know whether an advisor has good qualifications.
I buy and review courses so you don’t have to. Sometimes, I even find courses that are legitimate and worthwhile; and that’s how I accidentally came across one that led me to building a 6-figure business in a little under 5 years. Now, I still review courses because it’s my favorite hobby. 🙂 Learn more about me here.