Professional financial advice

Importance of financial advice

Even for financial market experts it is hard these days to keep up with all the information about the different types of saving, investing or financing. What is more, new products and variants are constantly being launched on the market.

Therefore, there are firms you can turn to if you need financial advice; the Austrian Economic Chambers (WKO) classifies them as financial service providers. On the WKO website, you can find more information on the different types of firms there are in this segment. Banks, insurance companies and real estate companies also provide specialized financial advice as part of their activities.

In addition, a number of Austrian consumer protection and counseling agencies – while not offering advice on financial products – provide support and advice in budget planning matters and as regards insurance or loan contracts. It may be useful to get in touch with these agencies for some initial advice, for example, to get an overview of your own financial situation or to get support if you don’t understand all the details of a financial contract. For detailed information, see the websites of the Austrian Consumer Protection Association (Verein für Konsumenteninformation or VKI), the Chamber of Labour on consumer protection as well as debt and budget counseling services (Schuldenberatung and Budgetberatung).

Types of financial advice

Not all financial service providers are specialized financial advisers. The activities of firms that do offer financial advice can be distinguished by two characteristics.

Distinction based on remuneration

Financial advisers either receive commissions or collect (pre-stated) fees. The commission-based approach is the most common among financial advisers. Here, customers generally do not have to pay for a consultation, but if they buy a financial product afterward, the financial adviser gets a commission from the product provider. In this case, the customer runs the risk that they might be advised to take the product for which the adviser gets the highest commission and not the product that might actually be the most suitable for them. In fee-based consultations, by contrast, the customer pays the adviser directly for the consultation. The financial adviser does not get a commission from the financial product providers but is paid directly by their customers.

What financial advisers do

In Austria, the most important financial advisers are banks, insurance companies, investment consultants and investment firms. They prepare individual analyses of and proposals for your personal finances, taking into account the different types and structures of investments and financing, the protection, preservation and potential use of your funds as well as potential restrictions.

The first thing a financial adviser does is taking stock of their customer’s current financial situation. Then, together with the customer, they set financial goals and define a planning horizon; often,  ecological and social aspects may be considered. Finally, they select the types of financial products with which the goals can be reached. This means that an individual plan for each and every customer is developed.

Some firms do not only offer financial advice but also sell financial products directly, that is, they are both financial adviser and financial product provider. There are also firms that only offer financial advice without directly selling products. This distinction is important, because there are laws that apply only to either financial advisers or financial product providers or to both. Examples of these are:

The following illustration shows who the most important financial advisers in Austria are and what they do.

Banks

Banks provide comprehensive financial advice to private individuals and companies. They usually sell and manage financial products themselves. Customers therefore receive financial advice and the corresponding products from the same source. The person providing the advice is usually an employee of the bank in question. As product providers, banks do not just sell their financial products through their own employees, but also through various other financial advisers.

Insurance companies

Insurance companies offer different insurance products that provide risk cover for private individuals and companies. It is important that any professional insurance advice also includes an analysis of the customer’s risk situation. Moreover, insurers play an important role in saving and investing, for instance through (endowment) life insurance products. For details on insurance companies and their products, see the page on insurance as protection against risk. In general, insurance companies sell their own products. That means they are both financial advisers and financial product providers. In addition, they work together with banks to offer a range of investment portfolios and fund products as investment vehicles. Insurance companies provide advice to their customers either through their own employees or through asset management advisers, self-employed insurance agents or insurance brokers.

Investment consultants

More than half of all financial services companies in Austria are investment consultants (source: membership statistics of active business licenses of the WKO Association of Financial Service Providers Q3/2023). These companies have the most comprehensive financial product portfolio of all financial advisers, and they provide all-encompassing financial advice to private individuals and companies. Investment consultants sell financial products to their customers that help them achieve their financial goals. These products come from different providers within the financial industry, for example banks, insurance companies or leasing companies. The consultants are mostly self-employed and work on a commission basis. There are also consultants that are not tied to specific product providers. Investment consultants do not accept funds for investment or financing; they only act as intermediaries between providers and customers. This also means that investment consultants will only receive commissions if they sell products.

Investment firms

The core business activity of investment firms is giving advice on various financial instruments, which is very similar to what investment consultants and banks do. Investment firms, however, limit themselves to securities, money market instruments and their derivatives. After a consultation, investment firms are authorized to accept investment instructions from their customers regarding securities and send them to banks. Investment firms with a license as defined in Article 3 of the Austrian Securities Supervision Act may also act as asset managers authorized through power of attorney. Investment firms provide advice often through self-employed consultants on a commission basis, who are called securities brokers and are part of a separate professional group within the WKO (for more details, see the WKO website). Investment firms rarely employ people providing consulting services.

Special form: Robo-advisers

Like in many other fields, digitalization is also playing an increasing role in financial consultation services, from consultations via video calls to chatbots and apps investors may use to manage their assets. Especially banks and fintechs are increasingly using so-called robo-advisers.  Robo-advisers provide AI-driven services (analyses of customer’s financial situation, transactions) with little or no human supervision. Robo-advisers come in many different forms, from systems providing simple consulting services to those performing complete asset management services.

Legal standards and responsibilities in financial advice

There are legal provisions in place that protect consumers from poor financial advice. Professional financial advice must be provided only by those who have been granted a license or a certificate of competence. This rule applies to banks, insurance companies, investment consultants and investment firms. Anyone who runs one of these types of companies without such a license or certificate makes themselves liable to prosecution.

There are also legal standards with regard to consultations with customers that financial advisers have to comply with. These especially affects securities and insurance policies. The most important legal requirement is that financial advisers may only act in the interest of their customers. In addition, since 2022, financial advisers have been legally obligated to ask customers for their sustainability preferences in investment and insurance. A good consultation takes place in several steps.

First, professional financial advisers will ask customers for all the necessary documents providing information about their income and asset situation. In general, this includes:

All this information is needed to prepare a thorough analysis of the customer’s financial situation and avoid situations in which a customer makes borrowing or investment decisions that they actually cannot afford.

The analysis of the financial situation serves as the basis for setting financing and/or investment goals. These goals need to be realistic. That means they need to be in line with the customer’s income situation, invested capital, investment period, investment risk and sustainability preferences.

After setting realistic goals, the customer will get advice about investment opportunities and financial products. Which products are suggested depends on whether the financial adviser is tied to certain providers. Good financial advice in general includes several alternatives that differ in terms of risks and prospective yields. The financial adviser will point out these differences during the consultation so that the customer can make the best possible decision.

Consultations have to be documented in investment profiles and consultation protocols. These documents have to be signed by the (representatives) of the financial adviser and the customer. All costs related to the investment or loan have to be completely disclosed. For detailed information on the legal requirements of a consultation regarding securities, see the website of the Financial Market Authority (FMA). There are also legal regulations concerning the brokerage of insurance products. The purpose of these regulations is to ensure that a customer enters into a contract only if they get a suitable product. These regulations do not only apply to business with private individuals (like consumer protection laws), but also to business with companies.

In addition to the regulations that apply to consulting firms, there are legal information obligations that apply to financial product providers. Banks, for example, have an obligation toward their customers to conduct viability and suitability checks before granting loans, opening accounts and making large investments. Similarly, insurers have to disclose key contract contents before concluding an insurance contract. For more information, visit the website of the Austrian Ministry of Social Affairs, Health, Care and Consumer Protection (BMSGPK).

In addition to legal regulations, there are also standards financial advisers may choose to apply. An example of such a standard is the code of conduct for financial consultants and securities brokers. For further information, go to the website of the Austrian Economic Chambers (WKO).

Why professional financial advice is different from finfluencing

Professional financial advice is subject to laws and regulations. Within this legal framework, financial advisers also provide their services increasingly through digital media. When looking for financial tips and advice on the internet, you might come across not only professional financial advisers, but also finfluencers. These are people who present themselves on social media as experts on topics like financing, saving or investing. They share information and give tips, often promising high rates of return or cheap loans. Especially young people often make financial decisions based on the recommendations of finfluencers.

It is important to know that the activities of finfluencers are hardly regulated by law. Every person can call themselves a financial expert on social media without having to fear any immediate consequences. There is no guarantee that finfluencers have the necessary training or experience to actually be able to offer specialized financial advice (as opposed to when you are consulting with professional financial advisers). In addition, finfluencers’ videos and blogs are usually directed at a large audience, while professionals provide individual financial advice. When considering recommendations from finfluencers, you should be aware of a few things; to learn more, go to the checklist finfluencing.