The recent order from the Securities and Exchange Board of India (Sebi) over price manipulation in two companies that barred many others, including film personalities, could be an eye-opener. It brings us to a fundamental issue in our understanding of money.
When it comes to financial planning, you come across a lot of information that suggests buying or selling assets. The most important difference to know is between financial knowledge and financial advice. Somebody you know who has sound financial knowledge need not be an advisor. At the same time, someone who is a professional advisor may or may not be knowledgeable about all things related to finance.
Financial advice refers to specific recommendations or guidance by a financial professional or advisor on managing your finances. The financial advisor may suggest specific investments or financial products and provide ongoing monitoring and management of your portfolio. You must understand that the remuneration or the payment to your financial advisor is primarily through product manufacturers like mutual funds, insurance companies or banks.
These companies reach out to financial advisors just like pharmaceutical companies reach out to doctors. When a doctor prescribes a drug to treat you, the idea is to get you back on your feet. It does not matter to you what company makes it as long as the drug formulation takes care of your condition. But at the back end, big pharma companies spend much money engaging doctors and distributors.
Similarly, financial advisors would help you with a solution to solve your saving and investing problems. As long as your problems are solved, you may not bother about how distributors or independent financial advisors get compensated.
The problem happens when you wander into the financial advisory ecosystem. Many certified financial advisors create videos on investor education. They distribute them on YouTube or Instagram Reels and dish out advice on upcoming initial public offerings or new mutual funds. Just like any new product or service, there are analysts making sense of these new products on social media.
When a new mutual fund or an IPO is launched, a budget is allocated to push the IPO to investors. So, besides the static advertisements informing you about the company and the IPO, videos are made to analyse the prospects for such new offerings. There is a good chance that your financial advisor could also benefit from bringing followers on social media or subscriptions.
On the other hand, financial knowledge refers to a general understanding of financial concepts, principles, and practices. This knowledge can come from various sources, including education, experience, and research. Financial knowledge can help you to make informed decisions about finances and can also help you understand and evaluate the financial advice you may receive.
While financial advice and knowledge are unrelated, they are not the same. Financial advice is specific and tailored to the individual, while financial knowledge is more general and applicable to a broader range of financial situations. Financial knowledge and access to reliable financial advice are essential to make informed decisions about your finances.
To know about the credibility of financial advice, you will have to check the registration details of the person dishing it out. Most credible advisors will put out their registration information and regulatory affiliation. You must listen to recommendations from only certified financial planners and advisors.
For the credibility of financial knowledge, you must rely on established media resources. If an individual is sharing information or views, look for sources of information. Any media resource must use credible sources only. Do not fall for any online information offering to give you ‘tips’ or ‘inside information’ that guarantees any return. Even regulated or certified financial advisors cannot make such promises. If they are doing so, they are violating the law.
Rajas Kelkar
(The author is editor-in-chief at www.moneyminute.in)