Registered Investment Advisers are registered with Sebi and are defined as fee-only financial advisers, that is, they are only compensated directly by their clients. This is different from other financial distributors at a large bank or a brokerage house, who are rewarded with commissions for the products they sell. Fee-only financial advisers can structure their fees in one of several ways, including hourly rates, flat fees, a percentage of assets, or a retainer.
As the name suggests, fee-only advisers receive compensation that is not tied to the products they sell. So, it is widely seen as the model that most readily adhere to the fiduciary standard, where Manisha’s financial interest comes first, which may not be the case for a distributor. A fee-only financial adviser cannot receive compensation from a brokerage firm, a mutual fund company, an insurance company, or any other source besides the client. This means they will be legally bound to give advice that is in their client’s best interest. Thus, they typically recommend investments that have low internal expenses, such as no-load mutual funds, stocks, bonds, and other investments that have no annual fees.
Some might assume all financial advisers have a requirement to give advice that is in their client’s best interest and to be around for support. But that’s not always the case, as a majority of the financial advice is based on “suitability”. What Manisha needs is a financial adviser who has a fiduciary responsibility to recommend investments that are in her best interest. However, she must ensure they understand how an adviser’s fee structure works before they start a relationship with one and make it workable in the long term.
Moreover, financial advisers differ in the services they offer. Some offer only investment management, while others include financial planning as part of their offering. Some specialise in areas such as retirement planning, tax planning etc. Manisha must choose someone who offers holistic advice, is ready to take complete ownership of her investment corpus and manage it in her best interest.
(Content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)
