Importance of fee-only financial planning
Say you understood the necessity of financial planning and have decided to hire a financial advisor. The decision to work with a financial advisor can be a great move in your financial life. Now the confusion starts when you need to find the right advisor for you. When you look for financial advisors, you’ll find mostly two types of advisors. There are people who sell products such as mutual funds and life insurance and also give you advice. And there are a few others who advice you on a fee but do not sell any products. In other words, there are Fee-only advisors and Fee-based advisors.
It is important to know the difference between the terms “Fee-Based & Fee-Only advisors”
Fee-only advisors charge a one-time or ongoing fee, depending on the types of services they provide. The fees may be charged on an hourly basis, fixed or based upon a percentage of assets under management. They don’t accept any compensation based on product sales, and they generally provide more comprehensive advice. They also carry professional designations like CFP which hold them to strict codes of professional and ethical conduct. Hence, the client will be provided with 100% genuine advice. The advisors have a fiduciary duty towards the client and there will not be any conflict of interests.
On the other hand, Fee-based advisors charge both fees and commissions depending on the products they sell. Financial company representatives, Financial Products salespersons, and brokers might call themselves financial advisors, but they need not always put the client’s interests above their own. They hold licenses that allow them to sell financial products for a commission. A conflict of interest occurs for Fee based planners, between what is the best for their client, and what is good for their own pocket. It is important to know, whether your adviser is a Fee-only planner or a Fee based Planner to assure 100% genuine advice.
In India, SEBI licenses Investment Advisers as per the ‘SEBI Investment Advisers Regulations 2013’. “Financial Planning” comes within the ambit of the regulations. The SEBI Registered Investment Advisers are not allowed to sell or transact in any product on behalf of or for their clients. They should only receive fees for advisory services as their income. In case an agent or broker selling a financial product, he or she must provide advice only on the particular product he or she is authorized to sell. They are remunerated by the commission they receive from the respective product companies.
By way of the above regulations, in India, the Financial Advisory services have undergone a sea change this paving way for FEE-ONLY advisers in the form of SEBI Registered Investment Advisers.