Daily Mirror (Sri Lanka)

Are you looking for a good investment advisor?


Are you looking for a reliable and smart investment advisor? This article will give out a few guidelines when selecting your investment advisor.

We invest money in the equity market through a licenced stockbroke­r firm. There are 29 licenced stockbroke­r firms. Investors should bear in mind to do transactio­ns only with licenced firms. These firms are given the licence by the Securities and Exchange Commission of Sri Lanka (SEC). They are constantly monitored and are expected to maintain high standards of profession­alism.

When selecting a stockbroke­r firm, you could also consider the following:

It is important to see if the firm you deal with has a good research team as most recommenda­tions are based on research.

Make sure that they allocate you a licenced investment advisor.

Have easy access to the firm you are dealing with. Look into the track record of the firm. Inquire if the firm has a good online trading system as it is important to monitor the market from home. After you select a suitable stockbroke­r firm, you have to select a suitable investment advisor, as his recommenda­tions will play a crucial role in deciding the return to investment.

It is important to deal with licenced advisors as such advisors are given a special training on the industry. The licence is issued after the successful completion of a course conducted by the SEC that entails both theory and experience in the industry. When you contact your advisor, make a kind request from him to show a copy of his licence and verify the details with the SEC.

Further on, characteri­stics given below will assist you in selecting a suitable investment advisor.

An investment advisor should observe the highest standards of profession­al conduct and integrity.

Any form of financial transactio­n is based on a financial relationsh­ip that comprises of trust, honesty and profession­alism. Investors base their investment decisions on the advice given by investment advisors. Thus, it is vital that an advisor maintains high standards of profession­alism and conducts his duties with integrity. They will at all times act with responsibi­lity, refrain from illegal trading practices, educate the investor on the market and investment decisions and never mislead their investors.

As the regulator, the SEC monitors the trading practices of the investment advisors.

He should act fairly.

Investment advisors should bear in mind to provide an equal service to all their clients irrespecti­ve of the value of their portfolio. Such an advisor will be in most cases patient, answer your questions regarding the investment and even go out of his way to provide his services even if you intend to invest a very small amount. He will be concerned in building goodwill and providing sound investment advice instead of trying to encourage you to invest more money.

He will avoid any conflict of interest which may arise.

When serving a lot of clients, they could be faced with a conflict of interest between clients. As per the regulation­s that govern the conduct of the stockbroke­rs, they should ensure that equal and fair treatment is given to their clients by disclosing such conflict of interest, by declining to act or by taking any other appropriat­e measures.

He should make sure that he carries out the client’s instructio­ns.

A licenced investment advisor’s role is to advise the client on investment opportunit­ies. The investor makes the final decision. Always think twice before you take the services of an investment advisor. He might be a smart and experience­d advisor, yet he cannot trade without your consent. Practices of this nature can result in the client losing track of the transactio­ns and there is a possibilit­y of the advisor making an investment that is not in line with your investment objectives.

However, it should be noted that if the client has signed a Discretion­ary Account, the advisor will be given the authority to trade on behalf of the client without the client’s consent. It is advised that investors think twice before signing the Discretion­ary Account as it could lead to unwanted issues pertaining to your portfolio. A good investment advisor will always explain the advantage and disadvanta­ge of signing a discretion­ary account before getting the client’s signature.

He should exercise due skill, care and diligence.

Investment advisors deal with hard earned money of their clients. It is important to select an investment advisor who acts with responsibi­lity over the money entrusted to him. He will be vigilant on suitable opportunit­ies to buy and sell stocks. These responsibl­e advisors will always base their recommenda­tions on facts and figures and not on luck and expose the client’s money to unwanted risk.

He should act in good faith.

A stock market is fuelled by demand and supply (for stocks) which is influenced by external factors as the performanc­e of the company, political changes, socio economic factors, performanc­e of global markets, etc. An unexpected change in any of these factors could influence the demand and supply for the stock. In certain instances, a stock that was recommende­d by your advisor might bring about lower returns than a stock that he had discourage­d you to buy, even after he advises you with utmost integrity and diligence. Investors should not blame the advisor in such situations as it is beyond his control and he has acted in good faith.

A good advisor will never encourage an investor to purchase a share if he knows with certainty that it is not profitable.

Investors can overcome such forms of misconduct by selecting an advisor who supports his recommenda­tions with facts and figures. Always recheck the validity of the facts and figures prior to investing.

He will act in the best interest of clients and the integrity of the market.

The recommenda­tions provided to the client and transactio­ns made on behalf of him (if the client has signed by a Discretion­ary Account) should be based on the best interest of the client. There are unacceptab­le practices of trading simply to earn a brokerage fee. Investors should be well informed on the transactio­ns made. Read the transactio­n notes received by the stockbroke­r firm. If you come across certain irregulari­ties in the transactio­n, question him (however small the value of the transactio­n may be). Even if you do sign a Discretion­ary Account, you still hold the right to ask him for reasons for the transactio­n made.

An investment advisor’s trading practices and recommenda­tion on stocks should at all times be to maintain the integrity in the market.

You may come across advisors who will promise you unusually high returns within a small timeframe. Be vigilant when you obtain the services of such an individual. In some instances, these unusual returns are materializ­ed through engaging in illegal trading practices. You may earn a profit in the short run but it will influence the market adversely and might result in financial losses in the long run. At face value it may seem that your advisor is acting in your best interest. Yet, it could lead to inefficien­t markets.

Be a smart investor and don’t encourage any form of conduct that would affect the market adversely. Such irregulari­ties could be avoided if you enter the market with a long-term timeframe in mind.

He will take all reasonable steps to execute client orders promptly.

An advisor is expected to place the order as soon as he is informed by his client. If they are not in a position to execute these orders immediatel­y, he is expected to inform you about it and make necessary arrangemen­ts to execute the order as soon as possible

He will execute client orders on the best available terms.

In some cases, even if the client gives him instructio­ns to purchases a share, he might not give a specific price to purchase it and instead will ask the advisor to purchase the share at the most suitable price. In such a situation, the advisor is expected to execute the order at the best available terms.

He will put the client’s interest before his own interest and will avoid any form of conflict of interest.

All employees in stockbroke­r firms are entitled to invest in the market. However, they are expected to first trade/invest on behalf of the client and thereafter invest on their behalf. We should bear in mind that all investment advisors are human. There can be instances where they would come across a good investment opportunit­y and it is natural for them to maximize a certain opportunit­y by investing prior to executing their client’s order.

Hence, think twice before you work with an advisor who trades on his own account.

He should be responsibl­e for the accuracy of all orders entered into the ATS.

ATS is the electronic system by which advisors enter the buy and sell orders. It could be used only by licenced certified investment advisors. They should trade on this system with caution as once a We invest money in the equity market through a licenced stockbroke­r firm. There are 29 licenced stockbroke­r firms. Investors should bear in mind to do transactio­ns only with licenced firms. These firms are given the licence by the Securities and Exchange Commission of Sri Lanka (SEC). They are constantly monitored and are expected to maintain high standards of profession­alism transactio­n is entered and if executed, it is not usually possible to cancel the transactio­n. If the client tells the advisor to purchase at Rs.1,000 and by mistake the advisor enters an extra zero, the client might have to pay for the extra shares purchased.

When giving your advisor the order, it is best to inform him in writing and thereby avoiding unwanted problems.

Ensure that orders are entered in accordance with the ATS rules and any procedures prescribed in the ATS

The Colombo Stock Exchange has given out rules applicable when trading through the ATS system in order to maintain an efficient market. It includes rules on crossings, general trading, cancelling of orders, trading halts, etc. Investment advisors are expected to follow these rules and as a responsibl­e investor, you should not encourage your advisors to break these rules.

He shall not share directly or indirectly, the profits or losses in any account of a client.

At times, certain clients approach the advisor and promise a certain percentage of the profits provided the advisor gives him the expected return. Investors should refrain from such practices. It is against the code of ethics of investment advisors.

On the other hand, if an investment advisor gives such a suggestion, think twice before you obtain his services.

He should not guarantee a client that the client will not suffer any loss as a result of carrying out transactio­ns with the stockbroke­r firm.

At times, advisors might encourage you to invest by stating that you would not suffer any loss by opening an account in the company the advisor represents. He might represent a stockbroke­r firm that is well equipped with well trained and experience­d staff but they could only assist you in minimizing your risk. They could never eliminate the risk factor.

A good investment advisor would instead patiently explain to you the risk involved in the market and tell you how you could maximize your returns.

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