SEBI regulates the investment advisory services in India
4th
July 2020 : The capital market regulator, Securities and Exchange Board of
India (SEBI), has amended the SEBI Investment Advisers Regulations 2013 and has
said that registered investment advisors must segregate the advisory and
distribution activities.
Thus,
if your investment advisor is an individual, then she can either offer you
investment advisory services or distribution services. If she offers investment
advisory to you, then she will charge a fee. And she cannot earn a commission
from mutual funds that you eventually invest in, based on her advice.
For non-individual
advisors (a corporate or an organisation), the client-level segregation needs
to be adhered to at the group level. Through
an arm’s length relationship between its activities, the corporate entity may
provide advisory services from a separately identifiable department.
Are
SEBI Registered Investment Advisors
Worth It?
Worth It?
Are SEBI Registered Investment Advisors worth
the fees that they charge? Is it worth paying someone for advice on your
investments?
Let us get answers to all these questions
below. Before that, let us understand different types of Investment Advisors we
have in India.
Mutual Fund Distributors:
Mutual Fund Distributors technically are
distributors for different Mutual Fund houses and they advise you for your
Mutual Fund portfolio.
They either earn via Advisory fees paid
by the investor or via Distribution fees paid to them by the Asset
Management Company like HDFC, ICICI, SBI, etc.
This distribution fee is indirectly charged
to the investor via the Asset Management Company while the
investor select any Regular Plan instead of a Direct Plan. This
distribution fee is charged to the investor perpetually
until they hold the units under the Regular plan.
Mutual Fund Distributors can either be any
individual or any institution like banks or any boutique firms. If a mutual
fund distributor/advisor is advising the investor on regular
intervals on the investor’s mutual fund portfolio, then it is
definitely worth to pay him the distribution/advisory fee. But if a Mutual Fund
Distributor is just like a selling agent for the Asset Management Company, then
one must think twice before paying the distribution fee.
If you are not sure if your current mutual
fund units are under regular or direct plan, have a look at it today itself.
Also, generally a thematic fund focusing on a
particular sector has higher distribution fee for the distributor but are not
of much good for an investor.
Banks or Financial Institutions – Relationship Managers
Banks or Financial Institutions generally are
Mutual Fund Distributors as well. If their relationship manager just sells some
mutual funds to investor to complete their sales targets and does not
regularly advice on managing the investor’s portfolio, one must
consider whether it is worth paying the distribution fee to him / her.
To check if the institution is adding value
to the investor’s portfolio, one must make sure that the
relationship manager of the Bank or Financial Institution has detailed
knowledge on the products he / she is selling to the investor and
should always be able to explain why a particular product is good for you after
understanding your risk profiling and your financial goals.
An honest relationship manager shall always
inform the investor about the fee which he / she is indirectly
earning via the investor.
Independent Financial Advisors or IFA
Independent Financial Advisors or IFA are
independent individuals who advice on different financial products and mainly
earn via commissions paid to them by the company who’s product they sell.
This generally leads to a free service, but
one must be sure if the advice is unbiased. Now with SEBI regulations reducing
the commissions, many Independent Financial Advisors are shifting to Registered
Investment Advisor or RIA model.
SEBI Registered Investment Advisors or SEBI RIA
SEBI Registered Investment Advisors or SEBI RIA are advisors which generally charge you
fees directly instead of indirect fees for selling anyone’s products. This
eventually leads to an unbiased advice as the source of income for the advisor is not dependent on any Asset Management
Company.
Investors would like to continue with an
advisor only if they are happy with the returns and
hence investment advisors intentions are in-line with the
investors, which is to generate better returns.
So one has to decide whether saving on fees is
worth jeopardising his investment goals (and in most cases you are anyways
paying indirect fees)?
Best Fee Structure of SEBI Registered Investment Advisors:
Best Fee Structure for the investor is
the one which is directly charged to the investor and not earned
indirectly from the Investment Advisor.
Also, fee structure in which fees charged are
proportional to the returns generated for the investor is also
desirable. This brings the interest of SEBI Registered Investment Advisor in-line with the
investors interests.
Whereas, in a fixed fee model the Investment
Advisor earns even if your portfolio doesn’t perform well. At the same time,
care must be taken that the Investment Advisor does not take undue risk just to
earn higher fees.
So are SEBI Registered Investment Advisors worth it?
Based on the above information, SEBI Registered Investment
Advisors generally charge fees directly to the investors and
hence the probability of his / her giving unbiased advice is higher.
The SEBI Registered Investment Advisor shall initially
understand the investors risk profile and their investment goals
before he / she gives any investment advice.
The investment performance of the investment
advisor shall also be regularly shared by him / her with you on regular
intervals.
In India, we are ready to pay fees to lawyers,
doctors, etc. for their advice, but somehow we are not used to paying fees to
Investment Advisors. This is either because we are not aware of indirect fee
structure which we are paying till this date and thought it was a free service,
or we are happy with tip/advice given to us by our friends and family.
When it comes to your lifetime savings and
financial goals, getting a professional investment advice with minor
fees is the prudent way to go.
If you have just began to earn and are yet to
have enough savings, focus must be given on ways to save. If you already have
savings and want to invest your savings, SEBI Registered Investment Advisors are definitely a better
option to consider.
Inadequate knowledge of the dynamics of
investment leads to financial mistakes, investors should evalute themselves and
check whether if its the right time
to appoint a SEBI registered advisory company.