Advice comes from an Advisor. A Seller cannot advise or generally do not advice, as the objective is to sell only. Advisor earns fees for the advice and Seller earns commission or the profit portion is inbuilt in the price of the product sold.
And this difference of seller and advisor has entered into the field of Personal financial management too.
You will find people calling themselves SEBI Registered Investment Advisor or AMFI Registered Mutual fund Distributor. There was no such demarcation earlier and Every person who sells/suggests any financial product, all are considered to be an Investment /Financial advisor. (Also Read: Financial Advisor in India- Who is best for your Financial Planning?)
In 2013, SEBI came up with SEBI Registered Investment Adviser Regulation 2013, where the regulator mandates that if anyone who is actually “advising” and not “selling” can call him/herself as Investment Advisor and also has to be registered with SEBI and follow strict compliance guidelines on Qualification, documents management, continuous education, Fee models and many more. (Read: What are the various fee models of SEBI Registered Investment Advisors?)
Till today (June 2022) there are hardly 1500+ number of SEBI Registered Advisers. You can imagine the reason, if the compliance is hard or selling is easy. You may check the list here.
To manage the confusion SEBI has also mandated Distributors not to use the designations like Advisor/consultant/wealth managers/planners/guide/coach etc. unless they are actually doing this and are registered with SEBI.
This is why those who are actually selling you Mutual funds, have to use the term “AMFI Registered Mutual Funds Distributor”.
Whom should you take advice from- SEBI Registered Investment Advisor or AMFI Registered Mutual funds Distributor?
Well, it all depends on what your Requirement is. As I wrote in the beginning, Advisor advises, and distributor/seller sells.
Depending on the work model, some advisors also help you execute the transactions to monitor and review it on regular basis.
The advice has to be backed by some rationale and should be suitable to your Risk profile. Generally Financial Planning becomes the base of this, and you will find many good advisors as Certified Financial Planners too. But remember when most RIAs are CFPs, all CFPs are not RIAs. (Also Read: Titles can mislead- Check the financial advisor certifications)
And Since advice itself is a broad term, so if given properly as per compliance guidelines sometimes stock advisory, without plan becomes part of it.
Also, Advisors generally advice you on many areas concerning your Personal finances which is not limited to Investments. They can guide you on Tax Planning, Estate Planning, Loan Management, and also on Suitable Insurances, Cash flow management etc.
Whereas in case of Distribution, there may not be any documented advice. There may not be written agreement signed to clear the terms and conditions between each other. There may not be a financial plan to back advise on. and if there is then do ask the person why is he/she not registered with SEBI. Also, the distribution may be limited to only making Investments and no other professional advice be provided.
Also Check- 9 important questions to ask before choosing your financial planner
How do Investment Advisors and Distributors earn their income?
Advisor cannot earn commission and Distributor cannot earn fee. Though both get paid by you, the investor.
In case of Advisors, Fee charged, on Financial Plan, Regular Consultancy or Investment Management, and all this could be fixed annually or percentage on Assets Under his/her Management. (Also Read: Everything you wanted to know about fee-only investment advisors)
In case of distributors, they earn commission from the products sold to you and you pay them in the form of higher inbuilt expenses in the product sold. (Like High expenses in Regular Mutual funds vs. Direct Mutual Funds)
Since both are paid by you, so it is up to you who you want to deal with.
As Investment Advisor has to work as Fiduciary and without conflict of Interest, so on the face of it they are considered to be more transparent in dealings. (Read: Conflict of interest- be aware when investing)
Though this does not mean that all distributors work with conflict of interest and advise only those products where they earn high commissions. There are many experienced and good people, who really work for your benefit.
However, this is one of the reasons SEBI came up with IA regulations to help consumers find the right advisors. But since the regulations allow Advisers to distribute also if they run a corporate entity, somewhere you will find advisers taking advantage of this rule and keep selling for commission with a face of an Adviser.
Thus, this is where Investors has to do their due diligence.