What are the fees charged by financial advisors? I thought financial advisors work on a commission based model, but recently one of my colleagues told me that he hired a financial planner who took an upfront fee of Rs 20,000. Which is better commission based or fee based?
There is a lot of confusion about the fees paid for financial planning services in India, mostly because there are a variety of business models, each of which charges clients in different ways. Below are the 3 popular models. You should always confirm this with your advisor before you start working with them.
In this model the advisors earn commissions based on the financial product (MF or insurance) purchased by you. Such advisors are commonly known as distributors. Distributors do not charge anything upfront to their clients, giving you the impression that their services are for free. Distributors receive commissions from the fund house or insurance company, depending whether you are buying mutual fund units or insurance policies.
If you purchase units of HDFC Small Cap Fund, then HDFC AMC (the fund house) which manages this fund will pay commissions to your advisor. Average commissions are 1% for equity MFs and 0.5% for debt MFs. A 1% commission would mean that you would be paying Rs 10,000 for every 10 lakh invested. Note that these commissions are not dependent how the MF is performing. Read: Can you explain expense ratio in simple language with a numerical example?
Trust factor is important in this case because some (not all) advisors could promote products which fetch them high commissions. So only work with trusted advisors.
Advisors who charge fees can do it in 3 ways:
A fee-only planner is someone who charges a upfront fixed fee for financial plan creation and advisory and does not receive any kind of commissions/incentives from mutual fund houses, insurers or other financial product sellers. Please note that the words "fixed fee" are important over here, the fees are not linked in any way to the amount being invested.
Fees could vary, from as low as Rs 5000 to Rs 30,000. This will depend on the level of experience, number of clients, track record of the advisor and the complexity of your requirements.
This is similar to the fee-only model, only difference being that the fees are a percentage of the amount being invested.
The difference between fee-based and commission based models is that in fee-based model the advisors earn their revenue directly from the client, whereas in commission based model the revenue is earned indirectly from mutual fund houses.
SEBI Registered Investment Advisors (RIA) are bound by SEBI regulations to work on a model where they earn their fees directly from the client and not from the asset management company (mutual fund house) or insurance company. So SEBI RIAs work on the fee-only, fee-based or a combination of the 2 models.
A commission based advisor will manage investments for you i.e. they will:
Fee-Only advisors will NOT manage the investments for you. All the documentation, KYC, account opening etc has to be done by you. Typically they will give you a financial plan, which will list out all the investments to be done. How you make these investments is upto you. You can choose a platform or distributor of your choice. Typically, fee-only advisors will recommend 3-4 direct buying platforms so that you don't have to pay commissions.
We do not favor one model over the other. Both the models have their pros and cons. We want to educate people about these models and enable them to make a choice depending on what works best for them.
Sachin Shah is a 30 year old Senior Software Engineer, working at an IT services company in Bengaluru. He and his wife want to plan for their retirement and also want to save for their child's education, wedding and for buying a car.View Case Study