Understand the services of Investment Advice and Portfolio Management

1. What is Investment Advice?

As per Directive 2014/65/EU on Markets in Financial Instruments (MiFID II), investment advice refers to the provision of personal recommendations made by financial professionals to clients. These recommendations can either be made at the client’s request or initiated by the investment firm, in respect of one or more transactions relating to financial instruments.  

A recommendation shall be considered personal if it is made to a person in his capacity as an investor or potential investor, or agent for an investor or potential investor. It shall not be considered as personal if it is issued exclusively to the public. Messages sent to batches of clients are unlikely to amount to investment advice.  However, the mere fact that a recommendation is made to multiple clients does not automatically disqualify it from being considered investment advice.  

Staying compliant with MiFID II requirements is crucial for investment firms as they strive to offer personalized, transparent, and well-documented advice.  

2. What is Portfolio Management?

Portfolio management involves managing a collection of financial assets such as stocks, bonds, or other investments, held by an individual or an institution. The purpose of a portfolio is to diversify risk and potentially achieve greater returns by investing in a range of different assets. As different assets may perform differently under various market conditions, rather than a single asset. There are two primary types of portfolio management: 

• Discretionary Portfolio Management which means that the buy and sell decisions are made by the portfolio manager. The term discretionary refers to the fact that decisions are made at the portfolio at the manager’s discretion. Such transactions are executed without the explicit consent of the client. Therefore, the client shall place complete trust in the manager’s abilities.  
• Non-Discretionary Portfolio Management meaning that the client retains decision-making power, and the manager provides advice, leaving the client to approve any actions taken. In this situation the client retains full control over decision-making. 

The portfolio manager must ensure that the portfolio aligns with the client’s financial goals, investment objectives and timeline, as well as its risk tolerance.  

Do not hesitate to contact us at info@salvusfunds.com if you require support with your MiFID II regulatory obligations or information about our course on IforPE. 

3. Suitability Assessment 

When providing investment advice or managing a portfolio, investment firms must conduct a suitability assessment to ensure that the recommended financial products or services align with the client’s needs. 

Key Areas of Suitability Assessment include: 

• Client’s Knowledge and Expertise – in the investment field relevant to the specific type of product or service. 
• Financial Situation – analysing the client’s current financial situation including his ability to bear losses. 
• Investment Objectives and Risk Tolerance – ensuring that the recommended investment services and financial instruments are suitable to the client.  

Firms are required to issue warnings if a product or service does not match the client’s situation, and when providing advice, the firm must explain how the recommendations meet the client’s preferences. 

4. Matching Clients with Suitable Products 

One of the most crucial aspects of both Investment Advice and Portfolio Management is ensuring that clients are matched with the right financial products. To do this, investment firms must establish clear policies and procedures that ensure: 

• A thorough understanding of the client’s financial background, objectives and risk tolerance. 
• Consistent evaluation of the client’s current portfolio and its suitability. 
• A detailed understanding of the risks and characteristics of each product considered for the client and any direct or indirect costs to the client.

Suitability assessment is not limited to recommendations to buy a financial instrument but to also hold or sell an instrument or not.  

5. The role of the Portfolio Manager

The portfolio manager is the person responsible for understanding the client’s economic and financial profile and investment goals, monitor daily the portfolio for stop losses, profit targets, internal auditing and risk management. Among its other responsibilities the portfolio manager must manage clients’ funds while exercising discretion according to client’s profile and mandate. Additionally, the manager must coordinate the investment selection decisions based on reports from the investment research teams and the feedback of the investment committee.  

Among other responsibilities a Portfolio Managers must: 

• Adhere to the firm’s code of conduct and preserve confidentiality. 
• Act in the best interest of the client.  
• Decide on composition of portfolios, execution of trades and transactions. 
• Assess the performance of transactions and monitor them continuously. 
• Draft letters to clients and report on the performance of their portfolios.  
• Prevent market manipulation. 

Final Thoughts 

Understanding the services of Investment Advice and Portfolio Management has never been more crucial than it is today. With the new regulatory challenges and the updated MiFID II, financial professionals must adapt to maintain the highest standards of service to their clients. A greater emphasis on suitability, transparency, and compliance is essential to ensure client trust and regulatory adherence. 

In collaboration with the Institute for Professional Excellence (IforPE), SALVUS offers a self-study CPD course titled “Understand the services of Investment Advice and Portfolio Management in 2024.” Specifically designed for professionals employed in Cyprus Investment Firms and other entities regulated by the Cyprus Securities and Exchange Commission (CySEC). This course provides an essential overview of the different types of services, the roles of the people responsible, and provides valuable insights into the areas of suitability assessment, investment policy, and portfolio management agreements. 

SALVUS, can support you ensure compliance with Investment Advice and Portfolio Management regulatory requirements, through MiFID II Compliance Advisory.  

Do not hesitate to contact us at info@salvusfunds.com if you require support with your MiFID II regulatory obligations or information about our course on IforPE.

#StayAhead

If you’re interested in learning more about this topic, please visit the following articles below:  

• Understanding Market Abuse: CySEC’s role and the MAR Framework 
• How to prepare the Annual MiFID Compliance Report in 2024 
• Providing Investment Advice & Portfolio Management under MiFID  

The information provided in this article is for general information purposes only. You should always seek professional advice suitable to your needs.