Recently, capital markets regulator Securities and Exchange Board of India proposed changes to make it easier for individuals seeking personal financial advice to become registered investment advisors (RIAs).
SEBI probably did this to encourage more professionals to obtain RIA licenses. The current conditions for this are very high barriers to entry in terms of education, experience, and net worth requirements. A distinguishing feature of RIAs is that they derive their income from fees charged to clients and are not commission-based agencies that derive their income from product manufacturers such as asset managers or insurance companies. This aspect of how they earn money allows them to tailor the advice and compensation given to clients, minimizing conflicts.
RIAs offer lucrative fee-based services for investors seeking unbiased financial planning advice, but interest in the profession has stagnated somewhat. Another option for financial planners and advisors is to represent a manufacturing company, where their income comes from a commission paid on each sale. Disputes are not a given for distributors and distributors, but the incentives exist and the onus is on investors to ensure that their advisors are objective and can be trusted to work in their favor. there is.
Intuitively, shouldn’t investors themselves demand and seek out more RIAs? After all, guidelines should be followed that effectively minimize conflicts in the advice given to investors. Regulatory approved and registered advisors seem to be a better choice.
But anecdotally, we know that’s not the case. There can be many factors as to why investors do not actively seek the help of SEBI registered investment advisors. What we do know is that one of the most common hurdles such advisors face is investors’ reluctance to pay fees.
Fee hurdles and free temptation
The fees charged by RIAs are typically allocated as a percentage of assets based on advice or a flat fee. For fee-based advisors, the revenue is an indirect fee from the manufacturer, and this cost is built into the product price itself.
Therefore, for RIAs, fees are very visible and must be paid by the investors themselves. On the other hand, in the case of commissions that sales agents earn, it is less obvious and investors may feel that the advice they are getting is free unless specifically asked. In fact, the commission is built into the annual cost of the product, adjusted in the daily price of the mutual fund scheme and, in the case of insurance, deducted from the premium paid. But investors don’t see any of that cost.
Although the financial impact of either option may be similar for investors, various surveys and scientific studies have shown that people do not like paying upfront fees for services such as financial advisory. Masu. They expect it to be available for free. No wonder RIAs are ignored by investors.
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When you walk into your local bank branch and receive investment advice without having to write a check for a fee or send any amount of money for an advisory fee, the advice feels like it’s free. However, there is actually no free lunch. They are paid by product manufacturers through commissions generated from the embedded costs they pay for their products.
In fact, this kind of income can have many contradictions, and if your aim is to maximize your income, even bank relationship managers will recommend financial products that are of no use to you. You may be tempted to sell.
If you think rationally you’ll understand, but when the word “free” is added to a service, all rational thinking is thwarted. There’s a new bank touting “zero-fee banking.” Think about it, if they didn’t charge fees, how would they make money, and if they didn’t make money, how would they survive? It’s not an NGO, it’s a bank.
Those that are not paid upfront are often embedded in cross-sold products or as other fees and costs that you may not be aware of.
Another attraction is the “premium return” term plan, which makes it feel like you’re getting term life insurance for free. But when you look at the details, the premiums themselves are much higher, and by the time you get your money back, the insurance company has earned a tidy cut on that amount.
Also read | Experts disagree on Sebi rules that prohibit investors from giving investment advice
Nothing comes for free. This is the reality we least want to accept because it feels good to get something for free. Bakeries and sweet shops often offer reduced prices or buy-one-get-one-free sales at the end of the day to ensure that their freshly made products don’t go to waste. In other words, if you wait until the end of the day to buy something, you can get something for free, but by then the quality (freshness) of the product has already deteriorated somewhat.
Financial services and advice are not lost forever. In fact, it’s the opposite. If you’re looking for sustainable, high-quality, trusted advice that’s personalized to your unique financial needs and circumstances, you need to pay the right price. If you’re just chasing the next new trend in investing, you can follow the herd for free. While the former can help you create wealth over time, the latter is risky and comes with a fickle crowd that can change direction at a moment’s notice.
It’s up to you to decide whether you want free financial advice or sustainable quality and results at a fair price.
Lisa Pallavi Barbora is a financial coach and founder of moneypuzzle.in.
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