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Till now, you have been getting the so-called free advice from your investment agents (more specifically MF distributors, insurance agents and IFAs).
So why am I telling you that ‘Fee-Only Investment Advisor’ or ‘Fee-Only Financial Planner’ better for you?
Because, when you go to a doctor, you want him to give you the right medicine and not those medicines which allow him to earn maximum commission. Right?
The people who sell you Regular Plans of mutual funds (be it MF agent, MF advisor, Robo Advisor or anybody) are basically product sellers. They sell Regular Plans of Mutual Fund schemes which helps them earn commissions.
So if they are product sellers, is it that they may not advise you properly?
Yes, it’s possible.
Suppose, that a Mutual Fund Distributor decides to sell only 5 schemes which give him following commissions every year:
- Mutual Fund A – 0.50%
- Mutual Fund B – 0.75%
- Mutual Fund C – 1.00%
- Mutual Fund D – 1.20%
- Mutual Fund E – 1.50%
As an informed investor, you know that all mutual funds are not the same. And that different mutual funds are suitable for different goals.
So after some analysis, you found that for your real financial goals, Mutual Fund A and B will be the best ones.
If you invest in schemes A and B, how much commission the distributor will get?
He will get 0.50% and 0.75% on your investments.
Now look at it from the perspective of Mutual Fund Distributor, who is a businessman and wants to earn more. He knows that schemes D and E give him more commission (1.25% and 1.50%). So naturally he would want to sell you those schemes.
Isn’t it? He will want to maximize his earnings by selling you higher-commission schemes.
But whether schemes D or E are suitable for you?
The answer is No as you already know (assumed earlier) that A and B are better suited.
And that is the problem.
The advice or recommendations given by the regular-plan selling mutual fund distributors is biased. Biased because they want to earn high commissions. And at times, this earnings-maximization conflicts with what the right investment advice is.
So even when the right funds for you are A and B, chances are very high that the MF distributor will push you to go for schemes C, D and E. He will not tell you why exactly (which is due to high commissions) and instead, try to convince you using redundant and useless arguments.
Whether the schemes the MF distributors sell are suitable for you or not is something that they may not be worried too much about. They will convince you to buy whatever they are selling; and which without a doubt is what offers them the highest commissions.
And you are smart enough to know what is right here and what is wrong.
And let me circle back to the idea of free financial advice which I mentioned in the opening paragraph.
Many feel that these distributors don’t charge anything directly and hence, their financial advice is free. But it isn’t. You are paying for it via commissions and that reduces returns of regular plans that these distributors get you to invest in. And this is the reason that Returns of Regular plans sold by distributor will ALWAYS be LOWER than Direct Plans (I strongly suggest you read article).
They will try to convince you and force-fit all your requirements with the products that they sell. And that is not right. It’s possible that the products or schemes which they are ‘not’ selling may be better suited to you. And they won’t tell you that because they will lose potential commission income then.
To know more, please do read How Mutual Fund Distributors may Give Wrong Advice because of commissions?
And if you are under the impression that your banker has your best interest in heart and is one you can rely on, then please wake up. It is not the case. Be informed that even your Bank Relationship Managers are Just Selling & Not Advising correctly.
It is for these reasons and to ensure that you get the right financial advice, which is conflict-free and suitable for you, it must be ensured that you only take investment advice from SEBI Registered Investment Advisors (SEBI RIA) or SEBI registered Fee-Only Financial Planners.
They are not product sellers (or distribute products) and they do not earn from commissions. Instead, they only earn from the fee paid directly by clients. Since no sale of commission-generating products is involved, the inherent conflict of interest is avoided. This means that the suggestions or advice from SEBI RIA and Fee-Only Financial Planners will be best suited for you and your goals.
It is only after knowing about clients needs, goals, assets, investment capability, risk appetite and risk capacity, etc. that the Fee-Only Financial Planner or RIA will do a detailed analysis, evaluate multiple scenarios and only, then create a proper, well-thought-out financial plan.
It’s obvious that a plain product seller (like mutual fund distributors) will not be deep-diving so much to try and understand your financial life. He will simply try to sell a product (that gives him solid commission) rather than understand your financial needs.
In my view, if you wish to take proper and unbiased financial advice, you should contact SEBI registered Fee-Only Financial Planners. I am a Fee-Only Financial Planner and Investment Advisor myself but there are many others. So if you wish to get in touch with, please use this form. Or if you wish to find an investment advisor near you, then you can also have a look at a list of registered Investment Advisors on SEBI’s site.
Remember, you can be sure of getting the right financial advice from Fee-Only Financial Planners.