There are two types of people- one who is known as the ‘Jack of all Trades and Master of None’, and one who is an expert in their domain and understands it inside out. It is precisely why we look for experts- we visit a cardiologist for a heart issue and not a physician; we hire architects instead of masons.
But what do we do when it comes to handling our finances, investments, and charting out long-term financial goals?
Most people discount the benefits of having an expert on board and try to ‘wing it’. Such people may face unsatisfactory growth, delay in achieving goals, and haywire finances. But the people who get a financial advisor on board let the expert take the reins and watch the magic happen.
However, if you are wondering that hiring a financial advisor may be expensive, it is not. This blog explores the different types of financial advisors and gives detailed insight into how financial advisors charge their fees.
Who is a financial advisor and what do they do?
A financial advisor is a trained professional who gives expert financial advice to their clients, particularly helping them achieve their financial goals. Financial advisors assess a client’s income, liabilities, goals, and several other factors to craft a unique plan to help them save more, invest more, and achieve higher returns. These professionals are trained in financial management and possess knowledge about financial planning and management strategies.
There are currently over 1,000 SEBI-registered financial advisors in India who deal with clients with different requirements. These financial advisors offer their expertise in a host of different areas like investment planning, retirement planning, dealing with loans and mortgages, and even help with protecting your children’s and family’s future.
Types of financial advisors and their charges
The fees charged by financial advisors vary based on the services they offer. However, one of the most crucial aspects that answer the essential question- how do financial advisors charge their fees? – is how they operate.
There are primarily two types of financial advisors:
1. Fee-only financial advisors
These financial advisors charge a flat fee in exchange for their services. Irrespective of the size of your assets and investments, their fee remains the same. For example, a financial advisor could have a client with assets worth Rs 50 lakh or a client with assets over Rs 1 crore; the fees levied upon both the clients will remain the same.
This fee could be a retainer, per hour, per day, or even monthly. Such financial advisors do not receive any commission or monetary benefits for recommending a certain financial product and are bound by a fiduciary duty to only act in their client’s best interest. This creates transparency around the financial advisor charges.
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2. Fee-based financial advisors
Contrary to how fee-only financial advisors charge their fees, fee-based financial advisors charge a certain percentage of the Assets Under Management (AUM) as their fees. For example, if a financial advisor works with a client and handles their assets worth Rs 1 crore, they may have a certain percentage they charge the client.
For instance, let us assume Mr. X has Assets Under Management amounting to Rs. 1 crore. The financial advisor charges 2% of AUM per annum as fees, which turns out to be Rs 2 lakh per year for Mr. X.
Fee-based financial advisors often suggest financial products to a client, even when they may not help the client. This is usually done since the financial advisor receives a commission or a kickback from the company selling those financial products. This creates a sense of conflict of interest and many grey areas around how financial advisors charge their fees.
What is a financial advisors’ fee in India?
Apart from the type of financial advisor you work with, there are several other factors that determine how much financial advisors actually charge in India. Here’s a list of these factors:
1. Expertise
Most financial advisors are generally a ‘one-stop solution’ for investors and offer a multitude of financial services. However, there are some financial advisors who may have expertise in a certain division of offering financial advice. This could be estate planning, investment planning, retirement planning, or even succession planning. The financial advisor charges for expert services may be a tad bit higher than those of all-in-one financial advisors.
2. Experience
One of the most important skills a financial advisor possesses is wisdom and experience. Financial advisors with relatively lesser experience may charge a little lesser than their seasoned and experienced counterparts. Financial advisors who have worked with popular personalities may also charge a premium for their services and may get referrals via word of mouth.
3. Certification and accreditation
Most financial advisors will have attained higher education in finance, in addition to professional degrees like CFA, CFP, etc. SEBI-registered financial advisors or those who hold certifications from the National Institute of Securities Market (NISM) or Chartered Wealth Manager (CWM) may charge a premium over others.
4. Services opted for
If the nature of services you seek is complicated and requires a team of financial advisors, you may need to shell out more. However, this is the case only with individuals who have large estates, businesses, and legacy empires. In this case, there is not an individual financial advisor at work; rather, an army of such advisors and planners. This increases the cost of the services.
SEBI’s role in deciding financial advisor’s fees in India
The Securities and Exchange Board of India (SEBI) governs the activities of financial advisors in India. In 2020, SEBI capped financial advisory fees for Registered Investment Advisors (RIAs) at 2.5% of the AUM of Rs 1.25 lakh, if they charge a flat fee.
SEBI is one of the major regulatory bodies that overlook the stock market. Read our blog on Regulatory Bodies in the Indian Stock Market to know more.
The takeaway
There are countless individuals who mull hiring a financial advisor instead of using a DIY approach. Financial management happens to be a tricky business. This is why financial advisors attain years of education and decades of experience to be able to help their clients to the best of their abilities.
The fees a financial advisor charges depend on a range of factors but are thankfully capped by SEBI to protect the interests of investors. This makes it even more lucrative for you to hire an experienced, SEBI-registered Research Analyst who will help you achieve your goals in a sustainable, fast, and streamlined manner.
Teji Mandi is a Sebi-Registered Research Analyst. We offer active advice on portfolio management and provide the latest updates from the stock market. Reach out to us for more information!
