Financial advisor you engage with has a direct bearing on scope of advice you are bound to receive. Nowadays we frequently hear about mis-selling at all levels. Various financial advisors have varying skills, knowledge and business model. So, when insurance agents, wealth manager or so called financial advisors, sells a product and earns revenue from the product maker, their lies a conflict of interest. Hence regulators have intervened to define the intermediary or the person who is advising the product. Regulator has clearly defined the types of financial planner and their scope of work which they can undertake for an investor.
Regulators defined only these can be Financial Advisors:
Advisor: This person will not receive any commission or remuneration from the product manufacturer like mutual fund companies or insurance companies. He needs to be registered with SEBI and has to follow all regulations and duties as laid by the SEBI.
As per rules, only a person registered as an Investment Advisor, with SEBI, is eligible to provide Financial Planning and/or Investment Advisory Services. In fact, SEBI in 2020, came out with the guidelines that persons/firms providing financial or investment advisory services, not registered with SEBI cannot call themselves “Financial Advisors.” SEBI has clearly divided the roles- the new financial advisors and old ones exist with following Business Models
Fee-Only Financial Planners or Advisors: A fee-only planner is someone who charges a 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. Financial advice is provided and clients are expected to take necessary action on their own. As per SEBI Advisor regulations, An investment adviser shall not receive any consideration by way of remuneration or compensation or in any other form from any person other than the client being advised, in respect of the underlying products or securities for which advice is provided.
The Asset Based Advisors: They charge an annual fee corresponding to the assets they manage. Their fee can be a percentage of the assets under management (AUM). For example, if you have handed over assets of worth Rs 1 crore to a fee-based financial advisor to manage, then he may charge an annual fee of 1% to 2% (Rs 1 lakh to Rs 2 lakh in this case) of the assets that he is managing. The fees of the advisor might not depend on the performance of your portfolio. The advisor will charge his/her fee even when your portfolio suffers losses.
Flat Fee Based Advisors: Some financial advisors charge flat fee for their services. They too come under fee based financial advisor. A flat fee based advisor collects a pre-stated fee for their services. That can be a flat retainer rate for investment advice.
Distributor of Financial Instruments
Distributor: Will only execute the transaction and will earn revenue from the product maker. Shall not take the advisory role and shall confine itself to selling single financial product (if somebody dealing in multiple products he needs registration). These may include your Insurance Agent, Mutual Fund Distributor (MFD), Bank Relationship Manager, Stock Broker, etc. These are neither Financial Planners, nor SEBI Registered Investment Advisors. They need not to get SEBI’s registration but require to fulfill the licensing requirements as required by the product, eg to sell mutual funds the distributor needs to have mandatory AMFI Registration Number.
Execution Only: Distributors are involved in selling various investment instruments. They could be mutual funds, stocks, insurance products or any other financial instrument. Their income is generated from the commission or brokerage that is generated by selling those investments. They do not charge their investors and their sole remuneration is the commissions that they earn. The core function is distribution of multiple products. They sell almost everything like insurance, equity investment, loan products etc. They do their own short listing and promote products based on self-appraisal. They may second products with their own research and execution platforms like online services or dedicated relationship managers etc. Majority of Banks, Individual Agents and Companies with presence in multiple states fall under these.
Regulator has allowed MFDs, and CAs to do Investment advisory, only if that advice is incidental to their otherwise engagement with the client.
Conclusion
Before determining the right financial advisor, you have to be very clear as to what you are looking for. In other words, what are your requirements from your Advisor? Every person has different needs, goals, and aspirations. Accordingly choose your advisor best suited to your needs.
