It is a common misconception that people consider the fee-only and fee-based financial advisors
as same. They might sound similar but, they are not interchangeable. The two vary from each other in numerous aspects.
You have to be aware of the differences between the fee-only and fee-based financial advisors before choosing one. Let’s understand the key differences between the fee-only and fee-based financial advisors:
1.Fee-Based Financial Advisors
The fee-based advisors charge an annual fee corresponding to the assets they manage. Their fee can be a percentage of the assets under management
(AUM). For example, if you have handed over assets of worth Rs 1 crore to a fee-based financial advisor to manage, then he may charge an annual fee of 1% to 2% (Rs 1 lakh to Rs 2 lakh in this case) of the assets that he is managing.
The fees of the advisor might not depend on the performance of your portfolio
. The advisor will charge his/her fee even when your portfolio suffers losses. The advisor might have interactions with clients on a monthly, bi-monthly, or quarterly basis. All fee-based financial advisors are Registered Investment Advisors (RIA) under the Securities and Exchange Board of India
(SEBI). They are allowed to offer direct plans to the customers.
2.Drawbacks of Fee-Based Financial Advisors
A major concern with opting for a fee-based advisor is that the advisor might prefer to service clients depending on the size of the portfolio. This might hinder your portfolio from getting the needed attention and uniformity in servicing clients might not be seen in this kind of advisory services. Also, they can invest in instruments that are not as per your requirement but, in the interest of the advisor. This is a case for conflict of interest.
3.Fee-Only Financial Advisors
Fee-only financial advisors charge a flat fee on all transactions, regardless of the portfolio reading Rs 50 lakh or Rs 5 crore. Unlike fee-based advisors, we can expect more uniformity from the fee-only financial advisors in servicing clients. This is because the fee remains the same for all customers.
4. Advantages of Financial Advisors
Unlike fee-based advisors, fee-only advisors don’t provide direct plans. Instead, they offer support for the execution of investments in instruments that the customer wishes and hence, there is no room for conflict of interest. They generally charge a fee on an hourly basis.
5.Points to note while opting for a Fee-only Financial Advisor
- The fee-only advisors are fiduciaries. Meaning, they have a legal or ethical bond with clients.
- The fee structure is clear and very much transparent.
- They are highly qualified and have obtained certifications such as NISM, CWM, and CFP. Fee-only advisors have genuine experience in financial planning.
- It’s wise to ask and check references from the former clients and take feedbacks.
- Check with the advisor for the frequency of evaluation of the portfolio.
The summary of the differences between the fee-only and fee-based financial advisors is given in the following table:
|Fee-Based Financial Advisor
||Fee-Only Financial Advisor
|The fee charged depends on the assets under management.
||The fee charged is the same for all assets, regardless of the quantum.
|The advisor is generally a company with a corporate structure.
||The advisor is generally a small firm with less than five employees.
|Can sell direct plans.
||Don’t sell direct plans.
With the investment process getting complicated each day, it may be necessary to obtain financial advice. Whether to go for a fee-based or fee-only financial advisor entirely depends on your requirements. Ultimately, both kinds of financial advisors will help you achieve your goals.