Investment Consulting

Investment consulting is the giving of professional advice by an investment consultant in order to support the investor, whereby advice may initially start with individual recommendations for investment purchases through to preparing an extensive investment strategy including long term support.

However, the investor always remains free to follow/not any recommendations given by his investment consultant. It is always the investor`s decision and responsibility to effectively implement any advice given by his consultant.

The right to decide differentiates investment consulting from asset management: The former entitles the investor to decide whether/not to implement the investment advice given the latter entitles only the asset manager to implement any investment strategy which has previously been agreed upon with the investor. Here, the investor waives his right to control and agree to each step beforehand.

Just as asset management, investment consulting is being offered by banks (so-called internal investment consulting) and also by third parties (so-called external investment consulting).

In most cases the investment consultant`s liability for faulty consulting is similar to that of the asset manager.

careful consulting as a principle

Like the asset manager the investment consultant too is liable to the investor on grounds of true and careful exercise of duties conveyed to him. He is under the obligation to give professional advice.

The diligence becoming applicable is determined by the above mentioned criteria, again being set on a careful commissioner. Requirements as to his professionalism are higher if the investment consultant performs his activities as a career against a fee.

A liability will be initiated by a careless and disloyal exercise of his duties which actually harm the investor.

However, the investment consultant is not responsible for the investment`s lack of success, which the client hoped to be successful. If the investor suffers a loss due to falling prices of the investment, the investment consultant is free from any liability, provided he had advised the investor carefully and completely and suggested a reasonable or advisable investment tool. Losses due to general weakness of the market which cannot be predicted are always to be borne by the investor.

On the other hand, the investment consultant will be liable if he offers his clients financial products which are not compatible with the respective client profile.

responsibilities of the investment consultant in principle

An investment consultant is responsible if he advises the client without care.

The basis for his liability is a suggestion for investment which objectively is not valid hence wrong.

The advice has to result in a damage suffered by the client.

From a legal point of view the following accumulative elements give rise to liability:

• Breach of contract;
• Damage;
• Causation between breach of contract and damage;
• Blame, will then be assumed.

Only if all preconditions are being met can the investment consultant`s liability be established and an injury suffered by the investor may be enforced with legal assistance.

Breach of contract

Advising the client without care is legally viewed as a breach of contract.

Thereby omissions during the first conversation may even give rise to a liability: If the investment consultant did not clarify the client`s requirements carefully and did not point out risks of the chosen investment strategy or suggested a strategy which was too aggressive and likely to result in losses, this would qualify as a breach of contract.

If the investment consultant suggests the purchase of securities which do not conform to the client profile, this may qualify as a breach of contract. In the event that the parties agreed in the client profile that only capital preserving financial products are reasonable (such as bonds), any suggestions to invest in a risky structuring product qualifies as a breach of contract.

If the investment consultant is to monitor the investment constantly, a failure to monitor the investments constantly or to inform the investor about any threatening loss has to be considered as careless breach of contract which gives rise to liability. If the investment consultant becomes aware that certain investments suggested by him against all expectation will develop negatively and he fails to inform the investor accordingly, such failure may constitute a breach of contract.

Thereby it has to be considered, that not every breach of contract has to result in an injury: If the investor on the grounds of being advised to do so by his investment consultant purchases a product which is too risky and structuring but makes a profit, the investment consultant due to no harm having been done is not liable, although his suggestions did not comply with the client profile.

Damage

As with asset management, damage is defined as an involuntary loss of assets, which may present itself in a reduction of assets, in an increase of liability or in loss of profit. The damage equals the difference between the current status of assets and the status, the assets would have enjoyed had the harmful event not happened.

To determine the damage, the assets concerned by the investment consulting are decisive. These will be compared to the hypothetical asset status which is unaffected by the breach of contract. Sometimes an unrealized profit also has to be included into the damage calculation.

Causation

Between breach of contract meaning the faulty investment advice of the investment consultant and the loss suffered, there has to be causation. Only this inner connection qualifies a simple damage to be a legally qualifying damage.

If the investment consultant suggests purchasing certain securities although he has reason to suspect that they will develop negatively, there will be connection between the suggestion to buy and the subsequent loss, provided the investor purchased the investment product on the advice of his investment consultant.

On the other hand there is no inner connection if the investor would have purchased the securities without the suggestion of his investment consultant, due to the fact that he already was influenced by positive reports in the media. The later suggestion to buy, issued by the investment consultant was not instrumental in influencing the decision which already had been taken by the investor. On the other hand it has to be checked whether the investment consultant, taking all conditions into consideration, was under a duty of care to advise against this investment in particular.