Is my Financial Adviser a Financial doctor?
Currently, there are a lot of professionals in the country who provide financial advice/financial services to investors.
As an investor, it is good to have multiple options but many times it confuses the investors and he is not able to decide where to go for the right advice. The financial industry in India is flooded with instances of mis-spelling, over-selling, and quoting wrong facts or data to get the business.
There are multiple points of contacts for an investor to get these advice/services from, for example, one can approach a bank wherein a banker or the branch manager usually advises him or the banks have wealth management outfits where a wealth manager is in touch with an investor, there are IFA (independent financial advisers) who also advise investors on various investment avenues apart from that there are stockbrokers, friends, and relatives.
As an investor, it is very important to not get confused with all the data and advice (many times just pushing of products) rather take an informed decision.
One has to understand that the structure of any industry usually has a basic architecture and is the same in the case of Investments which can be shown as –
Let’s take an example of e-commerce websites such as Amazon, the reason why they sell the goods at a discounted price is that they avoid the middlemen and procure the products directly from the manufacturers.
It is the same with Mutual Fund Industry wherein various intermediaries/distributors such as bankers, distributors, people from fund houses, financial planners, relationship managers, wealth management companies, independent financial advisors act as middlemen and get a heavy commission for “advising” on investments which are not more than a mere push for the products.
Often these people are considered or projected as the “financial doctors”. So it’s fair to draw a parallel between a doctor and the person who is advising you for your financial or investment needs.
There are broadly three kinds of doctors –
- He charges you upfront fees as consultancy fees and then prescribes you medicines according to the diagnosis and then you can buy those medicines from any medical shop that you want. He is not bothered where you buy the medicine from.
- This kind will not charge you any consultancy fees or minimal fees but he will ask you to buy medicines from a shop that he suggests (which usually will be owned either by him or will be nearby).
- He will charge you consultancy fees as well as ask you to buy medicine from a certain specified shop only; sometimes he will write the prescription in such a way that no other shopkeeper can read.
By now you must have already made your mind as to who is a better-suited doctor for you, similarly happens with your investment. There are three kinds of “advisors” or so-called “financial doctors” –
- He will charge you a small consultancy fee and then you are free to buy investments from any manufacturer (AMC), he will usually suggest you buy direct mutual funds as you will save significant money in that and hence higher return.
These are SEBI Registered Investment Adviser (RIA) and are dependent only on the fees from investor hence are not biased towards any product or shop (distributor).
- He will say “we do not charge anything to you” but you have to buy from us or we will assist you in buying. You got it right, there are no free lunches. These kinds of “advisors” are distributors.
The only reason they are not charging you anything upfront is that they get a commission in the form of distributor fees from the AMC (Asset Management Company).
By this time you must be thinking who pays for these commissions?
And you guessed it absolutely right; these are borne by the investors which can be clearly understood by looking at the difference in the Expense Ratio (cost of the fund managed by AMC) for Regular (With commission) and direct (without commission) Funds.
- He will charge you upfront fees as well as guide you to some distributor. There are many such people who work as financial planners and charge some small upfront fees to attract an investor but either they are a distributor (with ARN code) through some of their family members or are attached with some distributor.
Now you must be able to choose which “financial doctor” is better suited for your needs.