financial consultancy
As is so often the case, terms are used vaguely in everyday language. This is how it is found Concept of financial advice in many contexts in which a precise distinction is not always made between other terms.
What is financial advice?
Financial advice in the narrower sense is when someone is commissioned to provide comprehensive advice on a client's financial situation.
Distinction between asset management and investment advice
It differs from asset management and investment advice:
- The Asset management has a full mandate to make asset-related decisions for the client.
- Investment advice refers only to the area of the investments to be made or made.
On the other hand, financial advice – in contrast to asset management – does not have a mandate to act independently on behalf of the client.
On the other hand - in contrast to investment advice - it is not only investment-related but rather comprehensive advice on the financial situation. It relates not only to capital investments, but also to financing, debts, insurance and the client's financial risks.
In practice, the use of the term financial advice is unclear
In this strict sense, however, financial advice is rarely carried out - in practice there are usually intermediate forms, because this is either desired by the client or handled in this way by the provider.
As a result, financial advice is an umbrella term in practice, which also includes asset management and investment advisory activities.
In this broader sense, the term financial advice will be used below unless otherwise noted.
What does a financial advisor do?
Since such providers rarely act exclusively in an advisory capacity, a distinction can be made between general and specific financial advice.
General financial advice
If the term financial advice is used in the strict sense, it is a comprehensive consultation on all questions that arise around the financial situation of the client, e.g. Risk management, liquidity planning, debt advice, credit transactions,...
The advice provides information about possibilities, strategies, offers, experiences, risks and concepts on the respective topics and develops your own, comprehensive financial concept with the customer.
In addition to the actual recommendations, it can be given appropriate powers of attorney in certain areas or comprehensively and commissioned with the implementation of the concept for the customer - in the true sense it thus becomes comprehensive asset management.
Companies also use financial advice. In this case, it can also be about the balance sheet capital structure (weighting of equity and debt capital), the corporate strategy with the associated financing issues and asset management.
Special financial advice
If a provider specializes in certain questions in the financial sector, clients – both private and corporate – may only commission them for this area. This is the case, for example, with insurance companies and banks, which actually act as consultants from a specific core area: the consultant of an insurance company from the perspective of life risks and security options, a bank consultant from the perspective of investments and financing options/credits.
Most financial service providers have their own special areas and products tailored to them, which are requested by clients and used as part of their financial planning. There are often regional components of specialization, for example when consultants work for certain cities (such as in the metropolises of Berlin, Hamburg or Munich) and are particularly familiar with the local financial and investment world; On-site expertise is often indispensable, especially in the real estate sector.
But special mentoring for women, for example, also represents a market segment, since they require special attention with their gender-specific issues: How is the financial planning presented in view of the family and the desire to have children? How can you position yourself financially as a single parent? What specific insurance is needed in view of women-specific probabilities of illness?
It is often the case that different consultants work for the same client. As a result, a customer can draw on and benefit from expertise from a wide range of areas. The only shortcoming may result from the fact that the overview of the overall field of finance is lost.
Why do you need financial advice?
It is generally clear to everyone that you need a tax consultant from a certain tax revenue - the bottom line is that it is worth spending money in order to save a lot more money if possible.
In the case of financial advice, this may not (yet?) be as obvious, especially because it is often offered free of charge by the house bank, especially in the private sector.
So you get advice anyway without actually knowing what service is being provided (and at what cost) - information on company pension schemes, on disability insurance, on construction financing, on an investment in real estate - all of this is already financial advice.
Sometimes it is financial difficulties that lead to a discussion of the basic financial situation - in the form of debt counseling.
In addition, discussing and planning your own finances (or those of a company) obviously only makes sense above a certain wealth threshold – if you use your money for daily needs, you usually don’t have a great need for advice.
But even in this case, it can make sense for upcoming investments to plan the loans to be taken out well and to compare them with the expected income.
A replacement often has to be found quickly: the family car suddenly breaks down and a new one is needed; a company's machine is no longer in service before the depreciation period has expired, and a new one has to be procured. The list goes on.
One thing is clear: the more assets there are or the greater the financial need, the more accurate planning is worthwhile and comprehensive information is required, the scope and depth of which can then only be provided by trained specialists.
And the more specific the question, the more likely it is that specialized sector advice will be preferable to general advice - reputable advisors recommend financial strategies that you could not design yourself because you lack the information and knowledge.
Where to find financial advice
In connection with the discussion of one's own financial situation, whether as a private household or as a company, financial advice is encountered in different ways.
Free advice from a bank or insurance company, where you are or will be a customer anyway, has already been mentioned.
They can be described as direct sales: Certain financial products are designed by the bank or insurance company and sold directly to customers by their own employees.
In addition to these forms, there are many other providers of financial advice on the market for financial services providers. Some also work in direct sales like a bank or insurance company with their own employees.
Others use what is known as network marketing: the individual consultant works independently, but primarily offers products from a single provider. Through his personal network, he generates both customers and employees.
In this context one also speaks of structured sales; one example is Deutsche Vermögensberatung DVAG, one of the largest insurance distributors in Germany with an extensive range of comprehensive consulting services.
The functioning of sales in structured sales is not dependent on more and more customers - otherwise a pyramid scheme, which is prohibited in Germany, would be at work.
Furthermore, one speaks of multiple intermediaries or multiple representatives when a single financial advisor brokers/represents insurance and financial products from multiple providers.
Completely independent financial advisors, who are not tied to any institution or provider from the outset, require a trade license for their fee-based activity and are listed in a register in accordance with the Securities Trading Act (WpHG) if they carry out the relevant activity.
In the meantime, there are also forms of financial advice on the Internet using an automated "robo advisor". It is programmed in such a way that, as far as possible, no conflicts of interest should arise according to the so-called principal-agent scheme, in order to ensure the greatest possible independence of the advice.
Forms of financial advice
The forms in which financial advice is encountered (see above) can generally be divided into “dependent”, “independent” and “automated”.
Pros and cons of dependent counseling
With the vast majority of forms of dependent advice, one enjoys the advantage that the advice and the information made available are initially free of charge; the corresponding costs are cross-financed via the subsequent product purchase.
In addition, there are often large institutions such as a bank or another large financial service provider in the background of dependent advice, where one can assume that they have broad expertise and many years of experience that customers can fall back on.
On the other hand, it is a disadvantage that such advice only has a certain range of products - that is, that the best product for the customer is not necessarily used, but rather the one available from the provider (on whom one is dependent).
In addition, a conflict of interest can arise if advice on a specific product and its sale is combined with internal bonuses: the advice may then be guided more by the interest in the bonus than by the interests of the customer.
This is also referred to as the “principal-agent conflict” – a conflict arises between the client's institution (e.g. a bank or an insurance company) who commissioned the consultant and the client, whose interests should be given priority.
Pros and cons of independent advice
Independent advice, on the other hand, enjoys the advantage of being free from institutional interests; Only the consultant's own interests could stand in the way of unbiased advice, which, however, in principle names a basic problem for every form of cooperation.
Advice and being advised always has something to do with trust – the person of the advisor or the advisory team plays an immensely important role, especially in the sensitive area of finance.
Of course, the disadvantage of independent advice at first glance is the fee costs that usually arise. On the other hand, they depict reasonably realistically what the consultation (time) is worth.
In addition, the proportion of costs that ultimately includes the consulting costs via cross-financing in the case of dependent advice is eliminated, namely the costs associated with the institution (costs for financing the institutions behind a financial product).
In the best case, independent advice opens up the entire spectrum of what is feasible on the financial market - independent of institutions with the corresponding specifications. In other words, you have as free market access as possible with all the associated options.
Advantages and disadvantages of automated advice
Trust plays a huge role in financial matters. An automated counterpart in the form of a robo-advisor therefore has the considerable disadvantage that the trust ultimately has to be placed in a machine and its programmers.
Various experiences with moments of crisis on the financial markets have shown that this trust does not necessarily have to be unjustified - but it is categorically something different than talking to a human counterpart as an advisor.
The relatively good market success of automated investment advice is based not least on the fact that emotional decisions are virtually impossible - unexpected price slumps impress a machine just as little as momentary highs.
The form of automated advice is usually a lot more cost-effective than all other forms of advice if you take into account the cross-financing through product sales in dependent advice.
How much does financial advice cost?
Dependent Advice
The most common form in which a conversation about finance occurs is probably the conversation with the bank or insurance company that you are already a customer of: New products are brought up for discussion, new life situations require new financial decisions. This form of advice, especially for private households, is free of charge.
For companies, it can happen that a separate consulting contract is concluded for financial consulting, since this involves significantly more extensive consulting services with a categorically different time intensity.
Time or performance-related remuneration can be regulated in this contract.
Unbiased and neutral advice
Some consumer advice centers offer private individuals and private households free advice on financial matters: they offer their own free debt counseling service for financial difficulties.
For people with such financial problems, there is also a free offer from the German debt help service.
Other financial service providers advise either on a fee basis and then charge a corresponding hourly rate; or they finance their advice similar to banks and insurance companies “across” through the sale of corresponding products that are associated with premiums and/or commissions, which therefore contain costs for the sale of a financial product in addition to the so-called subscription share.
Automated advice
Many Robo-advisor based providers allow a free trial for a certain period of time (6 months to 1 year); after that, sales-linked costs of around 0,5-1% are incurred, depending on the provider.
In general, one should keep in mind that reputable financial advice is just as good as good tax advice: the opportunities that open up usually generate a return (or, in the case of loans and taxes, save so much money) that the financial The effort of the consultation definitely pays off.