By Suresh Sadagopan
Would you pay fees for services when someone is offering similar services for free? Obviously not. This is typically what happens with a fee-only financial advisor vs a product distributor.
But are the offerings similar? That is what needs to be understood.
Rajan was in a quandary with precisely this question. He was not able to make up his mind. He talked to his friend Ashutosh, who was well-read, financially savvy and wise.
When did the product seller offer advice?
Ashutosh smiled when Rajan posed this question. “You need to look the gift horse in its mouth”, Ashutosh remarked cryptically and smiled. Rajan waited for further elucidation.
Ashutosh said,” If you are getting something free, there could be strings attached, right? That should be obvious. That happens with distributors who have products to sell you, where they will earn commissions. They would be willing to offer some advice for free with a view to selling their products. Free advice is not entirely free, you see”.
Ashutosh continued. There are two main problems with this. Firstly, in a sales-focused approach, the objective is to position the product as the solution, even if it is a stretch. This may result in an inappropriate fit in terms of risk/ reward, tenure, liquidity, taxation, etc.
For instance, an insurance product may be inappropriate for someone looking for investments. For one, there would be premiums to be paid every year, which would be a long-term commitment, with insurance cover, low liquidity & a very long-term tenure. This may not be suitable for many.
Secondly, the product being offered may not be the most efficient or suitable one for the investor. For instance, an AIF may be offered where the charges are high, the underlying products may lack liquidity, be risky, have long tenures and a high investment threshold.
So with a product distributor, one may end up with products that are suboptimal, are higher in cost, lack alignment in terms of tenure, taxation, liquidity and sometimes may not even be what the investor should have in their portfolio.
This is the problem of free advice, he concluded.
Planning & its advantages
Rajan wanted to know whether paying a fee for advice is a good idea. Ashutosh said,” Normally, one pays for advice and services everywhere. We pay doctors, lawyers, architects, nutritionists, gym trainers, etc., for their services/ advice. But when it comes to finances, most people try to do it themselves. Or get advice from those who have a product to sell, which is like asking a bartender if one can have one more peg”, he said, smiling.
“Getting finances right is very important. Most people do not give finances the attention they deserve. Having a blueprint for one’s future is very important. A Financial Plan is created after understanding the requirements of the family, personal & professional profile, current financial situation, goals, aspirations, etc. The portfolio will be constructed after taking into account the risk profile, asset mix, diversification needs, taxation, tenure, liquidity, etc.,” noted Ashutosh. Ashutosh shared a report with Rajan to read on this subject.
Fee-charging advisors - Advisors who charge a fee for financial planning and advisories would need to be Registered Investment Advisers (RIA) with SEBI. They play the role of fiduciaries, where they put the client's interest ahead of all other interests, including any self-interest. Their advice, hence, tends to be unbiased, conflict-free and client-centric as they are independent.
They charge a fee for services rendered, do not sell products or earn commissions. They recommend low-cost and commission-free products, which product distributors would not consider suggesting.
This ensures that they always work in the client’s best interest. Due to this model they have adopted, the client does not need to second-guess if the suggestions given are the best suited for them.
Why paying a fee may be better for clients
Ashutosh had something more to say…”The client has access to a high-quality advisor who acts as a sounding board and a decision support system. The cost savings in low-cost, commission-free products can be significant. For instance, on a Rs 1 Crore MF investment, a non-commissionable portfolio would save Rs 70-80,000 pa in costs.
The advisor also optimises the portfolio and makes it work harder while at the same time providing properly for liquidity, contingency, emergencies, near term goals and expenses. The discipline and regularity of investments and the capture of all inflows with effective deployment in appropriate assets, with periodic portfolio reviews, make the portfolio do much better than ever before. A good advisor also offers several services which a product seller does not offer, like plan review, financial advisories on an ongoing basis, portfolio reviews, discussion and assistance on matters that are important.
Finally, the client gets control over what they get as advisories and services from their advisor without ceding the control to a product seller who will get commissions irrespective of the service they provide the client as long as the product is mapped to them. So taking advice from a qualified advisor is quite different and confers benefits which a product seller cannot”, Ashutosh concluded.
Rajan thought Ashutosh had explained the differences between advice accessed for a fee versus free advice very well. What seems obvious is not always so, Rajan thought.
The author is the MD & Principal Officer at Ladder7 Wealth Planners and the author of the book “If God Was Your Financial Planner”.
(Disclaimer: Views expressed are the author’s own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.)
