After so many years of working as SEBI RIA (I was among the earliest few actually), I can truly feel that the awareness about these professionals has increased. However, with different fee models being followed by them, Investors are still confused about whom to select.
Reluctance to pay fees has come down, in the past couple of years and investors are now realizing the importance of professional advisors. But, with different advisors charging differently the confusion has moved from “Why Charges”? to “How much Charges?” And this question comes to those minds who understand that Low prices may not always be the best.
They want to understand, how much do SEBI Registered Investment Advisor charge. and which fee model will suit their requirement. In addition, they also discuss the Investment philosophy and process being followed by the advisor. In short, Investors are also slowly getting mature.
The various fee models being adopted by SEBI Registered Investment Advisors are – Percentage on AUA (Assets Under Advice), Some charge Fixed fees with Limited advice, and some Full service under the fixed fee model. There are few financial advisors who also charge on an hourly basis. And many under corporate structure also offer distribution services where they earn commissions. All this further adds to the confusion.
This article is about these SEBI Registered Investment Advisor fee models and their Pros and Cons so you can select the best-suited one.
Let me start by saying that no single fee model is best. It’s what suits your requirement is best for you.
And also, it’s not advisable to search for the cheapest one. Since that may prove costly to you in the longer run. This is specifically referring to the Online Platforms that provide Low cost or No cost financial planning services just to lure you to transact on their platform to have your data and cross-sell you. (Also Read: How to choose the best online financial planner in India?)
There are many distributors who make you invest in Regular plans and may offer you FREE Financial (Investments) Planning, so you need to be sure what exactly you are looking for and from whom. (Also Read: Difference between SEBI Registered Investment Advisor and a mutual fund distributor?)
And remember, there are no Free Lunches in this Financial World.
What are the different Fee Models of RIAs?
As per SEBI Investment Advisor Regulations (Amendment 2020), Registered Advisors can opt for only two fee models.
One is a fixed fee and the other is AUM/AUA-based variable fee. Also, the advisor cannot change the model before completing 1 year of advisory engagement. This means that if you have agreed on to the fixed fee model, you can’t be moved to the AUM-based fee within this 1 year.
Beyond these two there can’t be any third fee model. So, if you are paying your advisor on some profit-sharing, fee offset, etc. model, then please ask for his/her SEBI Registration. (Also Read: Is your investment advisor SEBI Registered?)
Also, note that you can’t be shifted from the fee model to the commission model in one year.
You must be thinking that commission earning is not allowed to RIAs, but it is.
In a corporate structure, advisors are allowed to run both advisory and distribution divisions, though with clear segregation of employees and service offerings.
Let me take you through different fee models one by one in detail:
Fixed Fee Model –
As the name suggests, this would be a Fixed fee, which may be charged as one-time, monthly, quarterly, half-yearly, or annually. This fee does not depend on any variable like Investment volume, Performance, the number of transactions, etc.
In this offering, the advisor may be providing you a financial plan only or a financial plan with regular ongoing consultation. Its highly likely that you will not receive any support in the execution of the advice, but some may offer you one-time implementation.
Of course, in the latter one, the fee will definitely be high.
SEBI has put a maximum fee cap of Rs 1.25 lakh per annum on the fixed-fee model.
Pros of Fixed Fee Model:
- Good For Investors with High Investment Volume.
- Good for Investors who do not need hand holding in execution and have knowledge of all the technology around to execute the advice.
- Good for One-time advice.
Cons of Fixed-Fee Model:
- In the low-cost/fixed-cost model, there is limited growth, so to grow more, the advisor needs more clients. More clients mean more business management…so you need to be sure that the advisor you are dealing with has the required staff and technology in place.
- Fixed fee income is not dependent on your portfolio value, even if it goes up or down…so the advisor may like to advise conservatively.
- Since fixed fee advice is one-time advice, you may not be able to contact the advisor for your questions after the engagement period is over.
- Monitoring and Regular Reviews will be Client’s Job unless specified in the Service Offering.
Variable Fee – Percentage on AUM/AUA:
Many SEBI Registered Investment Advisors follow this fee model. In this, they charge some percentage on the Value of the Investments which are under their advice. Some ask for a fixed percentage and some have slabs where the percentage keeps reducing with the Increase in the Investments Value.
They call it a win-win model. As their growth is dependent on the clients’ AUM (Assets Under management), so they grow along with the client. And also remain considerate towards the Investment growth.
SEBI has put a Cap on these charges to @2.50% on AUA. But I don’t think you will find any advisor charging more than 1.5% (Including taxes).
Pros of Variable Fee Model:
- This is true that in this model Advisor growth is dependent on your growth.
- Good for Investors who have just started or have not accumulated big AUM which may look Big Hit on the pocket.
- Advisor offers good quality service as they will bill you on a quarterly basis.
- It’s a kind of long-term arrangement, so the advisor needs to be relevant and updated. He will keep you engaged and keep educating you, handhold you in different market and life circumstances. So, you should not diverge from your goals and keep following the process.
- Since this would not be a one-time or yearly engagement, the advisor may guide you on various tax planning and Estate Planning issues that may arise from time to time.
- The advisor would always be available to answer your queries.
- Monitoring, Reviewing, and Reporting will be the Advisors’ Job.
Cons of Variable Fee Model:
- Clients with a BIG AUM may not like this fee model at the initial stage. As they start thinking in absolute money terms rather than percentages.
- To give returns push to your portfolio, the advisor may advise on High-Risk Investments.
- As the fee depends on the quantum of the portfolio, so advisor may not advise you to do anything which leads to a reduction in portfolio value like Buying Car, House, Paying off the loan, etc.
Which fee model is Best for you?
As I mentioned in the beginning you are the best judge. Whatever suits your requirement Is best for you. Initially, with low investment value you may feel AUM is better but when values grow your attention starts moving towards a fixed fee.
I would say, let’s first put the cost aside, and decide why you need an advisor. If you are a do-it-yourself investor, then ideally you do not need any person to guide you as it is assumed that you are already good with your financial management.
If you are not then the undermentioned questions may help you in selecting wisely.
- Are you looking for one-time advice or a regular arrangement?
- Is your concern related to just Investment Portfolio management or do you look for answers to different other areas of finances like Insurance, Taxes, Loans, Wills, etc?
- If you are thinking long-term, are you disciplined enough to carry your portfolio for multi-year from now? Market movements will not bother you in any way. Look at how have you done in the past (without an advisor).
- Do you think with the growing job pressures and uncertainties in the employment market, going forward your work will demand more time from you, which may result in your money life going on the back burner?
- Do you think your family (your spouse, kids, parents) is active and knowledgeable enough to manage your financial situations in case something happens to you?
Give thought to these questions, and make these a basis to discuss with the advisor you approach and decide.