Financial Advisors do not charge you commission, they save you money.

I have had many cases where (potential) clients call in for advice, extract limited guidance and disconnect thinking they do not need a financial advisor once they knew his broad view, or as it happens in many cases – the name of his favorite fund.

100% of these clients end up paying higher commissions and refusing what they deserved free.

Let me explain . . . .

A Word on Commissions

Commissions – this word has become almost synonymous with the words ‘financial advisors’. The truth is that any good advisor actually helps you save commissions. To understand this, let’s understand how commissions work across various fund categories.

Mutual Funds

This is where investors have the choice of saving on commission based on the plan they choose.

For those who may be unaware, when you buy a regular plan of any mutual fund, the fund house pays certain commission (typically 1% annually) to the advisor through whom you bought the fund. If you buy the same fund directly with the fund house (i.e. direct plan), you will save on this 1% commission.

Naturally, the reason why an investor will go with a regular plan (and pay some commission to the fund manager / advisor) is because he will need ongoing advice on his investments. Such advice includes:

• advice on which fund to buy
• when to switch to another fund
• deciding on portfolio allocations from time to time
• maintaining investment records

So an investment advisor acts like the go to person for his client for everything related to their account.

Unfortunately over the past 10 – 15 years, investment advisors became more like distributors who sold a fund once and enjoy commission on it forever in future. The client did not receive any of the above service. This is what led to the introduction of the direct plans.

Why Should You Choose Regular Plans Over Direct

If your investment advisor is not going to keep track of your investments then the solution is (ideally) to change your advisor and not to switch to the direct plan. No one can predict with certainty what the stock markets will do in a week, month or even a year. But a good advisor should manage your folio strategically based on your goals, carefully maintaining the percentages across debt and different classes of equity.

In fact, portfolio management of funds, ETFs, PMS schemes (and not stocks) is a reality and a business which will grow immensely in the coming years. You will need fund advisors on an ongoing basis for this job. I can say with as much certainty that a good fund manager will outperform a client’s portfolio of Direct plans by investing in Regular plans over any given 3+ year period.

Fee Based Financial Advisors

These days a lot of SEBI Registered Investment Advisors have started charging a fixed fee for portfolio construction of clients. Even though I am a SEBI Registered Investment Advisor, I believe this is not the right way to manage funds. Portfolio management should be an ongoing process and not a one time job.  If fee based advisors start charging a fixed fee on an ongoing basis, then what’s the problem with a Regular Plan?

It took about 10 years for everyone to realize that the Regular plans have their flaws. It will take the next 10 years for investors to realize that Direct plans are an even bigger problem for their portfolios.

Further, charging a fixed onetime fee (let’s say Rs. 10,000) may work for somebody looking to invest a few hundred thousand, but imagine someone looking to start an SIP of Rs. 1000?

PMS Schemes

With more and more investors willing to invest in direct plan, distributors who were earlier focusing on selling Regular Mutual Fund plans have started looking for an alternative and hence they are focusing on marketing PMS schemes.

Investors are being convinced that PMS schemes offer higher returns. This may or may not true but the view certainly seems to be garnering strength if you look how the Assets Under Management (AUM) for PMS Schemes have increased over the last 2-3 years.

How Do Commissions Work for PMS Schemes?

This is where clients actually lose money. For most schemes, the expense / commission rates remain the same irrespective of whether you purchase directly with the fund house or whether you buy via an advisor.

It’s as simple as this:

• When you take the help of a financial advisor, the PMS Scheme will pay him a commission out of what they charge you for managing your fund.
• If you buy the scheme directly, PMS Scheme will charge you the same but not pay any portion of that to any financial advisor.

Basically – you missed out on free advice. If at all a good financial advisor may actually get your management fee / commission rates reduced from let’s say 2.5% p.a. to 1.8% p.a.

Fixed Deposits and Other Products

Sometime back we renegotiated the FD rate for a client who was getting interest @ 7.5% p.a. on his deposit. He now gets 7.6% p.a. on the very same FD. Yes, this happens all the time, all you need to do is talk to your financial advisor. Similar is the case with many other financial products.

Finally, when you pick up the phone and call a financial advisor, always ask: What additional services can you offer?

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Rajat Sharma

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