Is your financial advise actually 'free'?

“Aap broker ho ya party?” – a popular dialogue from the knock-out bollywood laugh riot 'Khosla ka Ghosla' is as much a question we should be asking our financial advisors right now. Why?

Try to google, “financial advisor near me”, and one will be swarmed with a plethora of firms – some calling themselves wealth management firms, some investment advisors, some financial planners, some financial advisors, independent financial advisors, agents, brokers, etc etc.

While on the face of it, all these terms look interchangeable, the big reveal is that there are broadly 2 types of financial advisors in India, who assist with our investment and insurance needs – this way or that, our advisor would fall into one of these categories -

1) The Distributor

Primarily the distributor, is one who sells a product and earns a commission in return. These distributors may be individuals or large companies or banks. They don’t charge the customer for providing financial advise or solutions – so on the face of it, for you and me, these would be ‘free advisors’. But behind the scenes, they receive commissions for every product which is sold.

Categories of distributors you might have met include a registered Mutual Fund distributor (also popularly known as independent financial advisors, before SEBI ruled in July 2020 against the usage of such term by a distributor), an insurance agent, or your bank relationship manager.

How to know whether you are sitting across a distributor – they shall have their own distributor code (ARN code/agent code) which will help the company identify the sale made through them, and pay commissions accordingly.

The easier way is to simply ask them whether they earn a commission from the sale – a good distributor who is truly working in your interest will make a clear disclosure of the commissions they earn (again available in public domain on the SEBI/IRDA website)

2) The Registered Investment Advisor or RIAs –

The Registered Investment Advisor is a relatively newer model in India launched in 2013 by SEBI. The advisor in such case is mandated to act as a ‘fiduciary’ – a technical term for – the duty of providing financial advice keeping the client’s best interests. These advisors are not allowed to ‘distribute’ and hence, the only way they can earn is through a fixed fee or asset-under-management based fee.

Think of an RIA as a doctor – who understands your symptoms, does a diagnosis and then prescribes you medication.

Categories of services which canbe offered by RIA – They can provide a range of solutions like retirement based planning, financial plan creation, insurance advisory, loan planning, etc.

How to know whether you are sitting across a RIA – Check for a Registered Investment Advisor code (RIA number) which is provided by SEBI on completion of required criteria.

In July 2020, SEBI has allowed for Investment advisors to offer either advisory or distribution services to clients – as per the client’s choice. This has been done, keeping in mind, that due to lack of awareness, Indians are unwilling to pay for financial advice (when they can get it for ‘free’ from the distributor!)

Interestingly, currently there are over 1 lakh Mutual Fund distributors, and over 20 lakh life insurance agents, compared to only 1400-odd Registered Investment Advisors.

So in case you haven’t come across a good advisor who is putting your interest first, don’t be surprised! While it would be short-sighted to assume that all distributors are working only for commission, as customers, being educated and aware of who exactly is our financial advisor is what matters most – are they a distributor or a fiduciary registered investment advisor.

Originally published by Femoneysta, a portal dedicated to providing women with unbiased financial education to live their best lives. We do this through our personal finance courses and our community which supports each other to move forward.