How your financial advisers are getting paid?

It is not just important to hire a financial adviser to take care of your investments, but also to know how they are getting paid. Why at all it is important to know how they get paid? The reason is because it is you, who pay it. Yes, this cost is to you and the gains, you make from the investments, are the net of all these costs. Hence, at least from an investment perspective, it is important to know about the one you should opt for.

Fee-based financial advisers
These are financial advisers, who earn commissions on the product they sell to their clients. The financial intermediaries, such as independent financial adviser (IFA), insurance agents, and mutual fund distributors, fall under fee-based financial advisory model. This is one of the most popular business models, not just in India but all over the world. Although certain regulations from Securities and Exchange Board of India (SEBI) with respect to mutual funds have cramped the fees, they earn in the form of commissions, leading many of them to diversify their product offerings. Nevertheless, fee-based financial advisers do carry conflict of interest. Though, there are people with this business model, who truly act in the interest of the client and suggest those products that are suitable, considering their financial situation. This being said, even if they act in their clients’ interest, they do carry potential for conflict of interest.

Fee-only financial advisers
Fee-only financial planners are those, whose remunerations do not come from commissions or brokerages, but from the fees, which their clients directly pay to them. Those, who are SEBI registered investment advisers (RIA) often fall under fee-only financial advisory business model. Under this model, they earn from what you pay them as their fee. This can be related to the practice of a professional, such as doctor. As a doctor earns from the consultation fees or surgery fees, these financial advisers earn from the consultation fees, which you have to pay them for using their services. Being registered with SEBI, they act as a fiduciary, which means, they do not have any potential conflict of interest with their clients. This is because, by law, they are not allowed to make their earnings from any sort of commissions or brokerages. There are often two types of fee-only financial advisory business models. First, those who charge a flat-fee to provide financial plan and then charge a percentage on your assets. The second type is of those, who charge only the flat-fee for financial planning. Needless to say, they only recommend direct plans in mutual funds, which is around 0.5 per cent to 1 per cent lower than the regular plans provided by fee-based financial planners. This difference is due to the commissions attached to regular plans.

Conclusion
By now, you would probably be puzzled as to which is more suitable for your needs. Usually, taking an advice from fee-only financial advisers is better as they are registered with SEBI and have a fiduciary responsibility to act in your interest. However, they do come at a cost and this cost is often more than what you might end up paying to fee-based financial advisers. Usually, fee-based financial advisers do not charge you for the financial plan. So, if your income and assets are on the higher side then anytime it is better to go with a fee-only financial adviser. However, if this is not the case then you would be well placed if you opt for the services of a fee-based financial adviser. However, do follow certain checklist before selecting your fee-based financial adviser. Certainly, in terms of qualification, a certified financial planner is desirable.