There are close to 50,000 mutual fund distributors in the country, including those who work as sub-brokers for national distributors. There are close to 918 Securities and Exchange Board of India (Sebi) registered investment advisers (RIA). Even if you remove half of the latter, who are said to offer just stock tips, you are still left with around 450 RIAs. How do you choose the right distributor or investment adviser? Here are three questions you need to ask.
How do you choose investment products?
Understand how your distributor recommends mutual funds and other products. And understand the process. For instance, if the conversation starts with the adviser nudging you to buy a particular product, she could be just a product seller.
But if she tries to ask you a few questions about your background, financial goals, and life history to understand your income and expenses, it means she is trying to get some insight, which is good. If your financial adviser talks about risk profile—and asks you to fill a risk profile questionnaire, which is good—she is trying to make a genuine attempt to understand you, the person.
Does she have a research process? If she recommends a few funds, try and ascertain how she came up with the list. If it’s just about past returns, the research could be hollow. It’s good if she goes beyond returns, preferably into qualitative matters like fund manager’s pedigree, expense ratio and so on.
Do you make a financial plan?
Many distributors recommend products individually. But with the entry of certified financial planners (CFPs) a few years ago, and now with Sebi-registered RIAs, the concept of a financial plan is gaining ground. Most planners take a money box approach, account for your inflows and outflows, income and expenses, your financial goals, family dependency and so on and suggest a financial plan. Product recommendations follow, and these are in sync with your overall financial plan.
The number of RIAs and CFPs is still lower than the entire distributor force. Moreover, many RIAs charge a fee, so their services aren’t as widely used yet. But that doesn’t stop a distributor from taking a holistic view of your money box and recommending solutions, instead of just hopping from one product to another. In fact, many distributors take the holistic route.
How much do you charge?
Your distributor may either not charge you anything directly or may charge you a fee.
It’s not bad to pay a fee. In fact, an RIA would typically invest your money in direct plans of mutual funds (where there are no distributor commissions) and charge you a fee. That way, she is accountable only to you and the fees are transparent. Ideally, this is a better way to pay fees.
A distributor earns commissions from mutual funds, which comes out of your investments. That’s not bad either, as long as your distributor discloses how much commission she earns from products she recommends to you.