Financial advisers are often compared with professionals like lawyers, doctors and consultants who earn a fee for their services. While there is no denying that advisers too exhibit the same kind of professionalism and offer services deserving to be compensated through fees, only a few advisers actually charge fees.
Their fear stems from the notion that Indian investors are unwilling to pay a fee and thus having this difficult conversation will lead to investor attrition. Therefore, a majority of distributors continue to depend on commissions.
But there is growing evidence of distributors charging fees, especially from investors who require a comprehensive set of solutions. Market regulator SEBI’s push towards advisory also seems to be fueling this transition. Since the introduction of SEBI Investment Advisers Regulations in 2013, RIA registrations are growing steadily. From 200 in 2015, RIA registrations have gone up to 600 in 2017, though it is still a small number. While a few of these RIAs are charging fee for advice, they are also offering execution services through a different entity. In essence, there would be a handful of advisers operating on fee-only model. A fee-only adviser is one whose only source of income is fee whereas a fee-based adviser can charge fee as well as get commissions from manufacturers.
Most advisers charge these two types of fees. Typically, they charge an upfront fee to prepare a plan which depends based on the complexity of the plan. In addition to this, they charge a retainer for managing the portfolio on an ongoing basis. This retainer fee can be a percentage (1-2%) of the AUA or a fixed amount.
Some advisers collect this fee directly from clients while others have outsourced this task. Joining iFAST platform allowed Saurabh Mittal, founder of Circle Wealth Advisors, to reduce his back-office effort of collecting fee from clients. iFAST’s fee collecting mechanism works something like this. iFAST produces two invoices - one for the adviser and second one for itself (platform fee) as agreed upon mutually by the adviser and her client.
The fee is deducted from the customer’s cash account opened on the platform. If the client has not maintained enough balance in this cash account for iFAST to deduct the fee, it sends an invoice intimating the client to top up the account. Alternatively, if the client doesn’t wish to top up the cash account, she can mandate iFAST to sell equivalent units of the scheme to pay this fee.
Sensing the shift towards advisory, Saurabh transitioned to fee based model in 2012. He parted ways with clients who were not willing to cough up fee. Today all his 70 clients pay fees. Saurabh suggests that advisers should ideally not operate on a hybrid model – charge clients who are willing to pay fee and not charge others. As a policy, his company does not start a relationship if the client is not willing to pay a fee.
He charges Rs 25,000 as an annual retainer fee for clients who require comprehensive financial planning. Others who need advice only on mutual fund investments pay a fee which can go up to 2.50%, depending on portfolio size. The percentage fee reduces as the portfolio grows.
Like iFAST, Chennai based Wealth India Financial Services which operates B2B platform fundsindiaadvisor.com also provides a facility to charge fee from clients. FundsIndia takes a one-time mandate from the client through which it debits client’s bank account every quarter. It is planning to introduce direct plans for RIAs on its platform soon.
But advisers need to bear in mind that platforms merely provide a mechanism for charging fees. It is for the adviser to convince the client to pay a fee.
For Mumbai based RIA Vivek Rege, the 2009 entry load ban came as a blessing in disguise. The ban turned out to be an opportunity to talk to clients about fee. Interestingly, some of his top clients were forthcoming in helping him work out a fee model. “Post the entry load ban, I reached out to a few of my top clients and apprised them about the change. Since they were happy with my services they helped me work on a fee model,” explains Vivek. Today, all his clients pay a fee for his services.
When SEBI allowed AMCs to share direct plan data feeds to RIAs in 2015, Vivek started moving his clients to direct plans. While he is providing execution services he has given up commissions for clients investing in direct plans. He operates on a fee-only model and is in the process of migrating his remaining clients to direct share class.
Like Vivek, many advisers across India are charging fee. Pune based techie Viraj Padhye who became an adviser in September 2016 has been charging a flat 25,000 fee right from the day he got his RIA license. All his 60 clients pay fee. Interestingly, his clients are not HNIs. They are salaried employees earning 5-50 lakh annually. This suggests that the mass affluent are open to paying fees.
Viraj says that RIAs like him will fully transition to direct plans once they have seamless access to direct feeds. Many RIAs are currently offering execution services through a different company, usually run by a family member. Doesn’t that make cost higher for the client? Viraj says that clients are under no compulsion to execute the plan through RIAs but he says that investors rarely implement it on their own. “I prepared a plan for a client who said he will execute it himself. I met him later and he said that he has kept the plan in his wardrobe and never implemented it. This is where we help,” says Viraj.
Do you charge fee? Share your experience.