SEBI (Securities Exchange Board of India) with it’s latest amendments to Registered Investment Adviser (RIA) Regulations, mandates that all registered financial planners can charge only on two basis. A Financial Planner can either charge a fee for financial planning or earn from distribution of financial products. The SEBI regulations prohibit collecting a fee and earning commissions from the same client.
A financial planner can charge his clients in 3 ways. These are;
Flat-Fee Only Financial Planner
Flat-Fee Only Financial Planner is someone who gets directly compensated by the investor. They charge for the financial plan and advisory services provided to the investor. The fees charged are not linked to the client’s Net Worth or Investments, but are linked to the amount of work required and the expertise or experience of the financial planner. They do not earn any commissions or brokerage from the products or strategies they recommend.
There is no conflict of interest when the planner lists out the action items in a financial plan. They earn no kick backs or under the table payments for anything. These planners are bound by fiduciary responsibility and are mandated by SEBI to keep the best interests of the investors in mind. Wealth Crafts is one of very few Fee Only Financial Planner in India, you can book a free consultation call with us to understand our fee only financial planning services.
Fee Based Financial Planner
A Fee Based Financial Planner is someone who charges the investor for planning based on the net worth or the investments held by the client. SEBI allows RIAs to collect a fee up to 2.5% of the clients investments. You will find most planners charging about 1% under this model. The major drawback under this model is that the planner is remunerated only when the client stays invested. A few investors would have experienced their financial planners recommending them not to clear their loans or invest in other non-financial assets.
Distribution of Financial Products
SEBI allows corporate RIA to earn through distribution or by charging a fee. Corporate RIA Distributors are involved in selling various investment instruments. They could be mutual funds, stocks, insurance products or any other financial instrument. Their income is generated from the commission or brokerage that is generated by selling those investments. Most people fall for FREE services thinking that they are not paying anything, but fail to realize that the products recommended by them include costs in the form of commissions. There is an element of conflict of interest here, as investors could end up investing in instruments that have high commissions.
6 Steps a Good Financial Planner Follows
A good financial planner, follows the 6 step financial planning process as illustrated below;
Type of Advisers you should stay away from;
Investment Recommendations Without Risk Profiling
Understanding the risk profile of an investor and assigning the right asset allocation suitable for the unique needs serves as a strong foundation for the financial plan of an individual. If a planner gives our recommendations without proper risk profiling, it is sign of grave danger and it is better to stay away from them.
Promises Guaranteed Returns
Human greed has destroyed more wealth than any other factor and continues to do so. As long as investor fall into the trap of guaranteed returns, you will find con men designing one ponzi scheme after another. It is common to hear one every couple of years. People don’t seem to learn from other people’s mistakes. Stay away from people promising guaranteed returns.
Offers Get Rick Quick Schemes
Creating wealth takes time. Human tendency to get rich quickly makes them to take unnecessary risks. They fall for traps which promise doubling or tripling of investments and end up losing all the hard earned money to crooks. It is important to understand the magic of compounding; a simple monthly investments of ₹ 5,000 can create a corpus of more ₹ 1,00,00,000 if continued for 30 years at 10% pa. Simple disciplined investments are more important than chasing greater returns.
Confuses you with Complicated Instruments
Some investors are satisfied only when the adviser comes with new products and strategies every now and then. They want to invest in new instruments thinking that they are exclusively available only for them. They think that simple products like mutual funds and PPF are not for them. They are given rosy presentations at fancy hotels with 5 course meals without understanding that they are ones sponsoring such gala dinners.