Know how your investment advisor charges you before picking the right one


As an investor, how do you then judge a financial planner based on the fees he/she charges? “The fee structure may have different considerations. Someone might charge over 1 lakh in the first year because he wants to deal only with a specific category of clients. Another planner may charge below 20,000 in the first year as he is in the process of building a clientele. Both could be equally good,” said Suresh Sadagopan, founder of Ladder 7 Financial Advisories an RIA.

Most advisers believe that instead of focusing on the fee of an adviser, investors should shortlist a few sign up with an RIA whom they could trust the most.

“The initial trust is all that matters. Investors need to open up entirely about their financial conditions. Only if they trust an adviser, can they be forthcoming about their issues,” said Chandan Singh Padiyar, a Sebi-RIA.

When to sign up: There is no straight answer to when in life one should avail the services of a financial planner. It depends on the knowledge, understanding the time a person can spend on planning managing his/her finances.

Understthe fee structure: The Securities Exchange Board of India (Sebi) has capped the fees advisers can charge their clients. If an RIA has a flat fee structure, he can charge up to 1.25 lakh. If the fee is based on the percentage of the assets under advice (AUA), it can be a maximum of 2.5%.

Most advisers follow different fee structures depending on the client. The fee is higher based on the client profile, complexity the efforts that they would need to put in to create a financial plan to fine-tune it.

The lowest fee that Padiyar charges client is 15,000 in the first year. “The base fee is for bachelors. It is higher for married couples where one spouse is working even higher where the husbwife are both working. In such cases, the fee can be up to 36,000 in the first year,” he said.

Fees for Sadagopan starts at 40,000 goes higher depending on the complexity of the portfolio.

Some planners charge a fee only for the financial plan initially, which can be between 15,000 25,000. If an investor wants to engage them help in implementation of the plan, the fee is higher.

From the second year onwards, advisers either charge a flat fee or a percentage of AUA. Those who charge a flat fee, typically, charge a lower amount than the first year.

Padiyar, for example, charges 50% of the first year’s fee. Sadagopan, in turn, charges a percentage of the AUA.

Investors must be cautious about the fees of RIAs, as it is possible that an adviser charges a low fee in the first year, but from the second, raises it much higher as he is charging a percentage of the AUA. Therefore, check this before signing up.

Sebi can decide on adviser’s fee

Purnartha Investment Advisers had challenged Sebi’s powers to cap the fees investment advisers can charge their clients in the Bombay High Court.

The company also contested that Sebi regulating fees is unconstitutional. It breaches the advisers’ fundamental right to practice a profession or business of choice.

The court ruled that Sebi Act allows the regulator to prescribe fees that investment advisers can charge. It also said that such regulations do not breach fundamental rights. They are essential measures for the protection of investors the development regulations of the securities market.

RIAs cannot ask for referral fee

iFast Financial India Private Ltd, a financial services platform, asked Sebi to clarify some aspects of its regulations concerning registered investment advisers (RIAs).

It asked the regulator if an adviser refers clients to another party, can he charge a referral fee? For example, can an adviser refer the client to a chartered accountant or an overseas adviser?

According to Sebi, RIA regulations don’t allow advisers to avail of such referral fees. “An IA can undertake an activity of providing investment advice for a consideration, the same cannot be construed to include referral fees as envisaged (in the query),” the regulator said.

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