Finance is difficult for many investors due to a lack of knowledge and time. When investors desire to seek help, they come across investment advisers, Financial consultants, wealth managers, etc. The investors get confused about the designations and are not aware of the difference between SEBI Registered Investment Advisors and Distributors. The investing public has the wrong notion that distributors who are actually selling products are advisors.

This wrong perception makes them engage with distributors and seek “advice” from them. The “advice” which they offer is tailored to sell the product. Since the distributors are remunerated by way of commission and do not charge a fee, investors tend to think they are getting free service!

A true adviser who offers client-centric, conflict-free advice, does not sell any commission product and acts in a Fiduciary capacity to their clients. They are registered with SEBI under Investment Adviser Regulations, 2013. In a recent notification, SEBI has clarified that only SEBI Registered Investment Advisers can provide advice and call themselves as investment advisers. Distributors can identify themselves only as Distributors. There are many differences between a fee-only, conflict-free adviser & someone who is merely distributing products.

Fee only advisor’s vs Distributors

1. Representation: Product distributors represent their Principals (AMCs and Insurance Companies) as their agents. A fee-only adviser represents only the client.

2. Remuneration

The distributors get their remuneration from their principals. The remuneration comes from the investors’ money and this is embedded in the product as commission. The distributors get it even if they do not provide any service. A fee-only adviser is remunerated by the client. Their focus and loyalty lie only with the clients. The adviser is paid by the client as long as the clients get the service and get value out of it.

3. Conflict of interest

There is certainly a possibility that distributors may sell the product which is most remunerative for them. A fee only advisor on the other hand offers advice for a fee. Hence, his judgment would only be based on what is in the client’s best interest as he is paid only by them.

4. Different standards

As Distributors, they need to follow the suitability standard, where they can sell the product of their principal if it is broadly suitable to the client’s requirements. Fee-only advisors, who are registered with SEBI, on the contrary, follow the fiduciary standard. In Fiduciary Standard, the advisors are expected to put the client’s interest above everything, including their own self-interest. They are bound to suggest such products that would best suit their client’s interests. They also follow higher standards of education, certification, documentation, and compliance requirements which again is in the client’s interest.

In summary, the Distributor (agent) represents the Principal, has an inherent conflict of interest, and follows a lower suitability standard. Fee-only advisors represent their clients, have no conflict of interest, and follow a Fiduciary standard.

It is sometimes argued that the Advisers should charge a one-time fee and not a recurring fee. We are forgetting the fact that the distributors get their commission throughout the longevity of the product on a monthly basis even if the service is provided only once at the beginning. The most important benefits of engaging a Registered Investment adviser are generally overlooked.

Benefits of engaging Registered Investment advisers:

(Monetary and Non-monetary benefits)

1.Monetary Benefits:

1.1 Advisory wealth: The advisor brings in discipline & regularity in investments. The advisor would also review the portfolio, weed out non-performers & on-board good schemes. There is a huge difference between the wealth created when an advisor is present & one in which one may be doing things on one’s own.

1.2 Direct MF plans lower costs to you: Advisers will suggest only Direct Plans which are cheaper than Regular Mutual Fund Plans. At a portfolio level for MFs, the difference is about 0.75-1% pa. On a Rs.1 Cr portfolio, that’s a savings of Rs.75,000 – Rs.1 Lakh per year.

1.3 Efficient money management: Advisers help in managing the money efficiently, tailored to individual client situations. Money for the various goals & upcoming needs is invested in the right assets, after proper evaluation of risks, liquidity, taxation, tenure, etc. Even liquidity & contingency margins are invested in appropriate vehicles to ensure better returns.

2. Non-Monetary Benefits

2.1 Conflict-free advisors: We are fee-only advisors and Fiduciaries. We don’t suggest any product with the ulterior motive of receiving the commission. You can now relax in the secure knowledge that you have an expert with you and she/he will always act in your best interests!

2.2 Streamlined & Aligned Portfolio:  We undertake portfolio reviews from time to time to ensure that the investments are in alignment with your financial goals’ requirements.  We carry out portfolio reviews on a half-yearly basis. However, we keep monitoring & suggest any corrective actions, if necessary.

2.3 Avoid Big mistakes: Often money mistakes drain away huge amounts of money. Wrong insurances, PMS products, Structured Products, Chit funds, etc. may not be suited to you and can be avoided if we are there to provide you counsel. Even one may be saddled with wrong schemes from MFs and Insurance companies, which are detrimental for your financial goals.

2.4 Decision optimization: We help our clients to make the right decisions across multiple areas like loans, Insurance, key decisions like a home purchase, foreign education of children & their funding, etc.   We help our clients to choose the right product in every area, be it insurance or investment, to ensure the best outcomes at optimal costs.

2.5 Sounding board: Clients have no one to turn to when it comes to finances. We are a sounding board to our clients, bringing sanity & refinement to their financial decisions. We are true, conflict-free advisors who have only our client’s interests at heart. We are Fiduciaries. Our clients can turn to us for counsel on financial matters and be assured that they will get good, aligned advice. We ensure clarity and peace of mind.

2.6 Gift of Time: If you do it yourself, a lot of time needs to be spent on implementation. Also, all these need to be done during the week, which will clash with the regular working hours. This can result in part implementation, procrastination & sub-optimal outcomes. When our operations team is involved, they help in executions & save a lot of your time.

2.7 Many services subsumed here: You do not have to pay separately in the future for Plan review, recast, portfolio review, rebalancing, implementation, financial consultations, etc. for all of which you would have had to pay otherwise. The saving here over your lifetime will be several lakhs of rupees!

2.8 Assurance to your family members: When we work with our clients, they get the implied assurance that if they are not around, there is someone to take charge & ensure continuity. We will guide the family on their finances during the difficult period after the person who was fully in charge of financial affairs is no more.

As may be observed, the benefits outweigh the cost many times. It brings home the point that the relationship with an Investment Adviser should be continuing & long term to achieve financial goals, financial security, and realise your dreams in life.

(Source: Mr. Suresh Sadgopan, Author)