Investment advisory has evolved in parallel with the growth of financial markets and economic shifts. In this process, investment advisors have provided professional recommendations to individual investors and firms, thus making investments more accessible and manageable.
Meanwhile, investment advisory regulations have been addressed differently across the world. These regulations have set examples for other countries and formed the basis of the current regulations.
United States
The relationship between companies and investors in the United States has begun to transform since the second half of the 19th century, with the gradual differentiation between the concepts of company management and shareholding. This shift has reduced shareholders' influence over company management, and it has become more difficult for individual investors to identify the most suitable investment options. In the early 20th century, market players such as brokers, dealers and financial institutions started to offer investment advisory to overcome information gaps and difficulties in capital markets. However, their services often served their own interests rather than those of investors. Therefore, other individuals and entities emerged to offer investment advice. Following the First World War, numerous investment advisory firms were established in New York and Boston, and one of the pioneers was Scudder, Stevens & Clark, which was founded in 1919 and began to provide more comprehensive and professional investment advice to individual investors.
The United States' first regulation on investment advisory was the Public Utility Holding Company Act of 1935, which entrusted the US Securities and Exchange Commission (SEC) with overseeing investment funds and companies. Following the SEC's report of 1939, the Investment Advisers Act (IAA) and the Investment Company Act came into force in 1940. The IAA aimed to prevent abuses in the capital markets following the Great Depression, and it was recognized as the fundamental investment advisory regulation. The regulation is still in force. The IAA offers a broad definition for an investment adviser, recognizes any form of payment that includes fees, commissions or other economic benefits as "remuneration", and embraces a flexible approach to the classification of the activity of providing professional advice.
Germany
In Germany, the first financial regulations emerged under the Weimar Republic. However, there was no specific regulation on investment advisory during this period. During the era of the Weimar Republic, the economic depression led to an increase in financial regulations, and the German Banking Act (Kreditwesengesetz - KWG) entered into force in 1934 to regulate banking activities, but this Act also did not include specific regulations on investment advisory. In 1998, the German Investment Code (Kapitalanlagegesetzbuch – KAGB) was introduced to impose comprehensive regulations on investment funds and investment companies for the standardization of investment advisory services. In 2021, the regulations regarding investment advice and other financial services in Germany under the KAGB and KWG were harmonized with those of the EU. The amendments included reforms in various aspects such as investor protection measures, risk management and transparency.
Under German law, investment advisory is defined in §1/1a of the KWG. Accordingly, investment advisory refers to the provision of non-public advice to clients or their representatives on specific financial instruments, tailored or based on the investor's personal situation. As such, investment advice must be personal and tailored with respect to specific financial instruments, directed to clients or their representatives, based on a test that reflects the personal situation of the investor, and must not be provided through general information channels. Moreover, such an advice should go beyond the simple provision of information and offer recommendations on transactions with specific financial instruments.
European Union Regulations
In EU law, investment advisory was regulated under the Directive 2014/65/EU, which became effective on 3 January 2018 and repealed the previous Directive 2004/39/EC. The repealed Directive was known as the Markets in Financial Instruments Directive (MiFID), and the new one was referred to as MiFID II. MiFID II provided a comprehensive framework for investment advisory services in an effort to enhance investor protection and market transparency.
According to the definition in the MiFID, investment advisory is the activity of providing personal advice on financial instruments to clients or their representatives. This definition refers to the provision of personal and targeted advice regarding the purchase, sale or other transactions concerning a specific financial instrument. As per Section (C) in Annex 1 of the MiFID, financial instruments include equities, debt instruments, derivatives and other investment instruments.
MiFID II further elaborates investment advisory processes to form an objective basis for advice and to ensure that the advice suits the client's financial situation. Its article 24/4-a obligates investment firms to provide detailed information on their recommendations and article 25/2 requires to collect more comprehensive information from clients. Thus, factors such as the client's risk tolerance and resilience to financial loss are analyzed to offer tailored and suitable advice. MiFID II art. 25(6) also necessitates to disclose that the advice is consistent with the client's needs and preferences.
Investment Advisory Regulations in Türkiye
Investment advisory was first regulated in Türkiye with the issuance of the "Regulation on Principles Regarding Brokerage Firms, Their Activities and Authorization" in 1992. Article 4 of the Regulation states that brokerage firms may provide investment advisory services upon obtaining permission from the Capital Markets Board (CMB), while article 12 stipulates the special terms and conditions required for this activity.
The first comprehensive regulation on investment advisory was contained in article 30 of the repealed Capital Markets Law no. 2499, where investment advisory was defined as a capital market activity. In 1993, the CMB issued the Communiqué on Principles Regarding Investment Advisory Activities and the Entities Engaged in Such Activities, Serial: V, No: 10, which introduced detailed regulations on investment advisory activities and the relevant entities. The Communiqué was revised in 1995 with the Communiqué Serial: V, No: 23 and finally repealed in 2000 with the Communiqué Serial: V, No: 47. The Communiqué Serial: V, No: 47 regulated the authorization of brokerage firms, portfolio management companies and non-depository banks to provide investment advisory services, including principles and contractual arrangements regarding such services.
The Communiqué on Principles Regarding Investment Advisory Activities and the Entities Engaged in Such Activities Serial: V, No: 55 was issued in 2002 and repealed the previous Communiqué Serial: V, No: 47. The Communiqué Serial: V, No: 55 also regulated investment advisory activities, similar to the previous Communiqués, but added special provisions on the recommendations made in the media and electronic environment. This regulation provided a comprehensive framework for investment advisory and stipulated rules regarding the advice provided on digital platforms.
The Capital Markets Law no. 6362 of 2012 defined investment advisory as an investment activity and harmonized it with the regulations in MiFID Annex 1 Section (A). Article 37 of the Law listed investment advisory among investment services, and articles 55/4 and 84/2 contained the regulations and compensation issues regarding investment advisory. Communiqué no. III – 37.1 of 2013, which repealed the Communiqué Serial: V, No: 55, addressed investment advisory activities in detail and presented the relevant regulations in depth.
The "Guidelines on Investment Services and Activities and Investment Firms" was prepared for the implementation of the Communiqué on Principles Regarding Investment Services and Activities and Complementary Services no. III-37.1 and the Communiqué on Principles of Establishment and Activities of Investment Firms no. III-39.1, both of which concerned the capital market activities of brokerage firms and banks, and it was adopted as the CMB's Resolution no. i-SPK.37.1 (dated 27.06.2014 and numbered 20/661). The Guidelines were revised with Resolutions no. i-SPK.37.2 (dated 23.09.2014 and numbered 28/953), İ-SPK.37.3 (dated 14.05.2015 and numbered 12/619), and İ-SPK.37.4 (dated 15.07.2016 and numbered 22/802), which were released on the website of the Board.
The evolution of investment advisory regulations through time reveals a series of important reforms aimed at increasing the safety and efficiency of financial markets. These types of regulations were first introduced in the United States and further shaped by Germany's meticulous legal approach and the comprehensive rules of the European Union. In Türkiye, a regulatory framework driven by local needs was adopted in accordance with these international norms and developments. Each country's unique approach reflected the different dynamics in global investments and assumed a significant role in ensuring international financial security. These regulations have always contributed to the structuring of investment advisory in a way that serves individual investors and the entire economic system. It is still uncertain how these regulations will evolve with the future technologies and market dynamics. In this context, the interaction and consistency between international and local regulations will shape the future of investment advisory.
SOURCES
Mehmet Arif Tuğ, Sermaye Piyasalarında Yatırım Danışmanlığı; Master's Thesis, Eskişehir, Anadolu University
Capital Markets Board, Guidelines on Investment Services and Activities and Investment Firms
Communiqué on Principles of Establishment and Activities of Investment Firms Iıı-39.1
Capital Markets Board Supervision Department Investment Advisory Activities and Foreign Practices
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