Trading and financial advice, the main differences

The world of markets is truly varied and we see it when two apparently similar subjects overlap, but in reality different in different profiles: the trader and the financial advisor.

The two figures, if seen as high-level professions, can overlap but, by analyzing what a trader does and what a financial advisor does, we will see substantial differences. Both find themselves risk management in the financial markets, but from a distinctly different angle. We then move on to the analysis of the two figures, first describing one and the other profession, then comparing them.

The trader: who he is and what he does

The trader is a set of two or more figures. A great trader is both a great technical analyst, a macroeconomic analyst and a risk manager. Its task is to analyze the market in order to profit from it by means of targeted trading operations.

Generally a professional trader is able to embrace different time horizons as regards his own operations, even if he prefers one type of trading over the others. At the same time, a trader can have his own personal long-term portfolio with a larger capital, some sort of long-term plan, and at the same time have a short-term portfolio with which he trades short-term and which allows him to have an immediate source of income.

The trader’s profile is therefore very specialized, a market handyman who knows how they behave in certain situations and who manages to profit from specific situations that repeat themselves, the market “patterns”.

Usually a trader can operate with his own capital, with third party capital through structures such as prop trading, family offices or investment funds companies. In some specific cases, especially if with a certain level of academic training devoted to quantitative calculation, he can work for banking institutions in the trading branch, a situation that has become more complex since the 2008-2009 crisis due to the cut in staff trading desk, guilty of having contributed to the worsening of the banking crisis due to a high rate of risk appetite due to the strong ability of banks to expose themselves to the market by having very high financial levers.

The financial advisor: who he is and what he does

The financial advisor knows the financial markets at a generally lower level of specialization than the trader, but he knows in depth the structure of the financial products aimed at to the mass of potential customers.

The financial advisor then passes an examination as his business is mainly aimed at third parties, he does sales and consultancy on financial products, structuring the offer directly on the client. The financial consultant, after an interview with the potential client, is able to offer products that are best combined with the needs of his client in order to achieve the results hoped for by the latter.

It is unlikely that a financial advisor will sell returns to clients, what’s more likely is that he will be to sell financial products aimed at long-term capital protection. In this context, the financial advisor is in fact a professional who deals with the sale of financial products on behalf of his Bank or other financial institutions. A good financial advisor has a client portfolio which he manages throughout his career and is responsible for monitoring the progress of his clients’ investments in order to achieve the desired results. His job is therefore to recommend the best investment or capital protection solution based on the client’s risk profile. Their activity is supervised by the register itself.

The substantial differences between the trader and the financial advisor

Although they are part of the same world, namely that of the financial markets, the approach of the two figures to the financial markets is completely different, highlighting at the same time some really important differences between the two professions. The trader, for example, does not necessarily need customers, or rather, his business is unrelated to having customers. For the consultant, having clients is essential, not having clients is equivalent to having no profit, just like a lawyer, a doctor or an engineer.

The trader specializes in trading financial instruments directly on the market, he is at the forefront of the opening of the markets until the close. The financial advisor specializes in consulting on financial products, to tailor a portfolio of investments or products to a particular client.

The trader manages the risk of direct operations on the market, he is the one who directly profits from the purchase and sale of financial instruments, the financial advisor profits from his consulting activity, both through a fee and through recognized commissions by the issuer of the financial products, whether they are directed or “endorsed” by the brokerage company for which he is employed.

The differences are obvious, yet many tend to confuse the two activities as they both face, certainly differently, the world of financial markets. This cognitive bias where these two figures are confused is mainly due to the false belief that those who work within the financial markets must be a sort of "soothsay", his work is practically to predict market trends.

We have seen this bias in some films of recent history, first of all "The Wolf of Wall Street" where Jordan Belfort is perceived by the mass as a trader when in reality he was a broker, an intermediary who dealt to sell shares with high potential by means of what are defined as "cold calls", a completely different job from that of the trader, which we saw instead in the film "The Big Short", which explains in a very concise and effective way the subprime mortgage crisis experienced by traders and investment funds.

Addressing mainly to those who want to pursue a career in the world of finance, we can take a look at two worlds very close to each other but at the same time parallel, which never meet.

Original article published on Money.it Italy 2022-10-13 08:58:00.
Original title: Trading e consulenza finanziaria, le differenze principali