Last Updated on June 5, 2023 at 8:26 am
This article will discuss how SEBI-registered investment advisors (RIAs) earn a fee and which option is best suited for investors. This article is written with the help of inputs from Ashal Jauhari and other RIAs who are members of my curated list.
SEBI only recognises two types of fees: A fee not exceeding Rs. 1.25L a year or a fee not exceeding 2.5% of assets under advice per year. However, there are several nuances that readers ought to be aware of.
1. Flat Fees: RIAs charge a flat rate for all clients regardless of their net worth. A slightly higher flat rate is charged for NRIs. This fee cannot exceed Rs. 1.25 Lakhs a year per client.
2. Hourly Fees: The rate per hour is fixed for all. Typically, the time spent per client is about the same, so the fee is usually flat. This fee cannot exceed Rs. 1.25 Lakhs a year per client.
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3. Percentage of net worth (aka assets under advice): This is a proxy for trail commission from regular mutual funds. Higher the assets higher the fee. This is naturally undesirable as the RIA would get a higher fee for offering the same advice to someone of higher net worth. This fee cannot exceed 2.5% a year per client.
Note: Some clients incorrectly believe that getting a fee as a percentage of assets implies that the advisor would “work more” and fetch them higher returns. This is naive and incorrect.
4: Fees depending on complexity: Some RIAs charge a (flat) fee that depends on the effort involved, often subject to a ceiling. This fee cannot exceed Rs. 1.25 Lakhs a year per client.
5: Direct Income from “other” products: Some (well, many) RIAs “recommend” products not regulated by SEBI and earn from them. These include products regulated by IRDAI, such as life and health insurance, and products regulated by RBI -bonds, fixed deposits etc. Naturally, such RIAs should be avoided. There is no limit on such income.
6: Indirect income from mutual funds and other products: Many RIAs have a distribution “arm”. When a client approaches them, they asses which is more profitable – advising the client and recommending direct mutual funds or directing them to the distribution arm and asking them to invest in regular mutual funds, there is no limit on such income.
So the RIAs have two sets of clients. They get trail commission from regular funds and fees as a percentage of assets by recommending direct plans. These types of RIAs should also be avoided.
It should be obvious to the reader that only those that charge a flat fee or an hourly fee is the best choice. From a general perspective, this limits the number of eligible RIAs, but from an individual’s viewpoint, it makes the selection much easier.
Regular readers would be aware that we maintain perhaps the oldest list of fixed-fee RIAs who earn no other source of income in the country. We started compiling this list even before the inception of SEBI RIA regulations in 2013. More than 1000 of our community are currently working with these advisors. See: 685 investors rate their experience with SEBI registered fee-only advisors. And, Are clients happy with fee-only financial advisors: Survey Results.