Financial advisers, a person who helps to identify goals, prepare a plan to meet them, help manage uncertainties in our investment by recommending insurance and emergency fund, help to reduce our tax liability and many more. Every financial adviser is not the same.
Some advisers call them Fee-only advisers while some are popular as a fee-based adviser. They might sound similar, but differences prevail between them. However, both facilitating wealth management services to individuals. Let us understand how they are different from each other.
Fee-Only Advisors
Fee-only advisers charge a kind of fee from their clients for the wealth management service he pays to them. If you hire a fee-only adviser you pay a flat fee, or on an hourly or project basis. This is the way for fee-only advisers to earn their salary. They do not work towards promoting or distributing financial products that could otherwise earn them more.
Fee-Based Advisers
Fee-based advisers get a kind of commission when you invest through financial products suggested or distributed by them. They hold a license that allows them to distribute investment and insurance products for a commission. They do not charge you for their wealth management services, however, some advisors might additionally charge you for their advisory services.
Who Is Better?
Well, the fee-based adviser is always on the troll with the style of dealing. It is assumed by investors that these advisers recommend a product that brings more commission to them unless they feel a fiduciary responsibility towards the investors.
It is much likely for a fee-based adviser to recommend scheme A that brings him a 1.5% commission, instead of scheme B that brings only 1% commission. However, this is not true. Only those funds are advised to investors that stand as per their interests, goals, and risk.
For fee-only advisers, investors say they are more likely to be neutral and act in the best interest of the client, as the remuneration is not affected by the commission structure.
Fee-only adviser charge their fee in different ways, like
1. Flat Fees: These kinds of advisers normally charge between Rs 5,000- Rs 50,000 in the first year, and they charge high to NRI investors. If you have hired them, you can approach them anytime during the year for any-investment related advice. Once the financial plan is made, the follow-up fees for the subsequent years are usually lower.
2. Asset-Based Fees: In this, the adviser charges the investors based on their assets. Generally, this charge is equal to 1-2% of the investor's asset value. Like for example, if the investor has an existing portfolio of Rs 10 lakh, then they might be charged Rs 10,000 every year (at 1%) for managing it.
3. Performance-Based Advisers: These types of investors based their fees on a two-tiered structure. Initially, they charge investors based on their assets. For example, investors will be charged an annual base fee of 1% of their assets initially, and then they will be charged a 20% share in profits over and above that if the portfolio returns are more than 10%.
Out of all these, it might be better for investors if they go choosing flat-fee charging advisers. This will also work out well if they have a reasonable portfolio size.
How To Choose An Adviser?
Well, for this very first prepare a list of best financial advisers in the country or in your area. Make sure that the names you have shortlisted are all certified financial professionals (NISM, CFP amongst others) or a SEBI-registered investment advisor (RIA).
After you have a list of names, go searching about each of the advisers. Check about their records and credentials, their way of dealing with the market. Ask about their experiences from their former clients and take their feedback. Check out their fee-structure, check its transparency, do analyze if there are any hidden charges.
After you have checked all the above things then shortlist the best three out of the list based on your analysis. Get Prepared with a list of questions that could be asked as per your financial priorities, after that meet and interact with the short-listed financial advisers. Hire among them only when you are comfortable and clear about what you are paying for.
For any kind of query, you can contact us at Shri Ashutosh Securities Pvt Ltd., we are here to help you in any way possible.
Happy Investing!
(Mutual Fund investments are subject to market risk Illustrations are for example only, there is no guarantee of returns. Past performance is not an indicator/guarantee to future returns).