Fee-based Financial Planning

W.e.f April 2013, SEBI (Securities and Exchange Board of India) has mandated that Investment Advisers (including individuals & companies) must offer their services in a fee-based manner. Prior to this notice, Investment Advisers (including Financial planners) could offer their services on a fee-based or commission-based manner to their clients. It helps to understand various fee-structures prevalent in the industry.

Fee-based planners usually earn their remuneration only on the basis of fees they charge their clients. They do not earn commissions by selling products to clients.

• The main advantage of fee-based financial planner is he/she offers an independent financial advice, placing client's needs and interest ahead of all other factors.
• No pushing of unsuitable insurance policies or low-yield mutual funds, client is free to buy recommended products from any provider directly.
• As planner receives fees only from client, there is no conflict of interest.

Commission-based planners typically earn their remuneration by charging their clients a fees as well as earning commissions on products they sell to their clients.

• As these planners earn commissions from client as well as from insurance companies/mutual fund houses, conflict of interest arises.
• With limited financial knowledge and tools, client may not be able to determine if there are other products that offer better performance than the ones they're advised on.

You may also find some planners offering free financial planning service. While this may appear attractive, remember that there is NO Free Lunch. They probably earn their fees in other forms and not disclose it to you. Be aware that poor quality products could also be sold under free advice leading to poor quality returns.

SEBI's recent move is made keeping in mind the best interest of client and eliminating any conflict of interest that may arise in the delivery of service to clients. So, it makes you wonder how would you go about investing in all these plethora of products offered in the market without assistance. For this SEBI and IRDA have announced more investor friendly measures such as DIRECT plans from Mutual fund houses and buying of Insurance products through banks or online platform. After seeking advice from fee-based financial planners, clients have two choices to buy insurance & investment products.

Option A - They could still avail the services of a traditional insurance agent and/or Mutual fund distributor (through Banks or fund houses) to make their investments. [OR]

Option B - They could use online platforms to directly purchase insurance policies at discounted prices (up to 30% on certain policies). Similarly, the DIRECT plans of mutual fund houses offer expense ratios that are 0.5% to 1% lower on a p.a basis than the regular plans sold via distributors. These discounts are now possible because you save on the commissions.

In this manner, client gets to play a part in taking responsibility of his/her investments and avoids mis-selling episodes of the past [according to Mint research, mis-selling by Indian insurance industry is estimated to have caused investors a loss of Rs.1.5 Trillion over the last decade - http://www.livemint.com/Money/R1nkNP5vpbcPX00sQwn28H/Compensate-life-insurance-misselling-victims.html (need Mint subscription to access URL)].

Choosing the right products by consulting a financial planner and leveraging Online investment platforms could add up to to higher cumulative returns in the long term for investors.