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What your adviser will do with your hot stock tip

Did you know financial advisers who are only licensed to sell mutual funds outnumber the advisers licensed to give advice on individual stocks by a factor of three to one? Also, those mutual fund advisers aren’t allowed to provide advice on the merits of single securities.

What happens when you bring an investment idea to your adviser?

First, did you know financial advisers who are only licensed to sell mutual funds outnumber the advisers licensed to give advice on individual stocks by a factor of three to one? Also, those mutual fund advisers aren't allowed to provide advice on the merits of single securities: So they are not allowed to offer an opinion on whether that hot stock tip you got is good or not. What they can say is how picking a single security in general fits into your overall plan, assuming you have one. But because they can't handle the transaction, they are less likely to encourage it anyway.

If you do have an adviser who is licensed to provide advice on single securities, there are still some considerations which potentially influence their advice.

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If they are a traditional stock-jockey who is buying and selling stocks for you regularly, it's a like a little bonus for them. They would normally be pitching you, but instead you are calling them. If they have to sell out a current position to initiate the new one, that's two trades on the book. And if the stock sours, it's hard to point the finger outward.

On the other hand, many advisers have a particular stable of stocks that they monitor and in many cases all their clients invariably get a portfolio made of up of a combination of these names. That might be limited to no more than 30 stocks they can keep an eye on. If your pick is not in this universe, then from a practice-management standpoint, monitoring one name for one client becomes a poor return on their time. Particularly if your holding is going to be small.

And sometimes, an adviser will reluctantly buy the stock for you with the proviso that it's not part of the plan, but more of a purely speculative trade. In that case, you might as well open your own discount brokerage account and save a few hundred bucks to make the trade.

These are some of the conflicts of interest that can affect advice. That said, just because they exist doesn't necessarily mean your adviser can't provide a professional opinion (if they are properly licensed to give it).

READERS : What's been your experience when bringing a stock idea to your adviser? Did they put the kibosh on the trade? Did it make money if they bought it? Or did they save you from losing money by not buying it?

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About the Author
Personal Finance columnist

Preet Banerjee is a consultant to the financial services industry. You can follow him on twitter at  @PreetBanerjee. You can find his conflict of interest disclosure on his website. More

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