2.1.2.6 Investment advice

74. 1) Introduction - Investment advice1 is the activity of “providing personal recommendations to a client, either upon its request or at the initiative of the investment firm, in respect of one or more transactions relating to financial instruments”.2 A firm giving investment advice gives its clients a personalised investment advice.3 The actual choice of investing according to the advice and the execution of the order are both left to the investor and the broker used by the investor respectively. An investment firm giving only investment advice would, therefore, not have access, nor need to have access, to its clients’ funds or assets. It would not need to access its clients’ funds or assets as the actual execution of orders and the order (transmission) itself are carried out by other parties.

75. 2) Relevant risks - Giving investment advice, therefore, does not lead to the investment firm obtaining financial instruments on its own balance sheet nor does it mean that the investment firm controls these financial instruments for its clients. It does solely lead to an exposure to the investment firm’s client for the fees receivable. Miss-selling (advising inappropriate financial instrument or giving incorrect or erroneous advice) or other errors in the investment firms’ operations which result in a liability of the investment firm to its client, might lead to the client having a financial claim on the investment firm’s assets.

76. 3) Framework for assessing risks – As discussed here above in the case of order execution or portfolio management, the agency costs of investment advice can be significant.4 “Principal-agent risks can be acute in the [advice] context. They include fraud, […] and incompetence”.5 Moloney then further focuses on the agency risks of differences in interests based on remuneration. “Remuneration structures have very considerable potential to misaligning incentives in the [advice] process”.6 From a prudential perspective the risk of providing investment advice is in the liability risk of operational errors. The risks identified by Moloney should be addressed by the market conduct requirements of MiFID II. As discussed in Paragraph 36, these MiFID II requirements will not result in complete prevention of operational errors, especially those resulting from human error, incompetence or fraud.