Looking for affordable investment advice? The fixed-fee model can offer a way out

Those willing to pay for conflict-free financial advice can turn to Sebi-registered investment advisers (RIAs). The Sebi website provides the list of RIAs registered with it.

Well-regulated by Sebi and mandated to earn income only via fees from clients, and not other sources such as product-based commissions, RIAs can be your way to sound financial advice. But how much should you be willing to pay for such advice, and what can you expect in return?

While this can vary from one RIA to another, it is also a function of the fee model—fixed fee or as a percentage of the assets on which you seek advice (AUA)—that an RIA follows. Broadly speaking, the fixed fee model can offer you a more affordable route to financial planning. Note, however, if you opt for a relatively low flat fee option, the range of services beyond core financial planning is likely to be limited.

Who are registered investment advisers?

RIAs are individuals or corporate entities that have been authorized by Sebi to offer financial planning and investment advice to clients for a fee. They cannot earn any income in any form (such as commissions) from any person other than the client for the products being recommended. The concept of RIAs emerged for the first time in 2013, following the introduction of Sebi’s investment adviser regulations, which have since undergone numerous changes.

Put simply, a RIA can help you create a detailed financial plan with strategies on how to achieve your key financial goals, taking into account your risk tolerance. They can advise you on suitable investment products to choose and those to avoid, as well as how to meet your insurance needs.

According to Sebi data as of 31 March, there are 660 entities registered as RIAs (those filing periodic reports) with the regulator. But as Avinash Luthria, Sebi RIA at Fiduciaries, points out, once you exclude the RIAs reporting nil fee (indicating no operations) and those offering only equity/derivatives (that is, those not really functioning as advisers), the RIA numbers go down to 376. Of this, Luthria believes 10-15% to be fixed-fee only advisors.

Fixed fee or percentage of assets as fee

Now, a RIA can follow a fixed-fee model, a percentage-fee model where a certain percentage of the assets under advice (AUA) is charged as a fee, or a combination of the two. Typically, under the fixed fee model, the RIA would charge a higher amount in the first year, followed by a lower fee from the second year onwards (renewal fee). Some RIAs charge the same fee for all clients, while others determine the amount based on the scope of work involved. According to Luthria, the first-year fee could range from as high as ₹1.5 lakh to as low as ₹12,000. Then, there are many who charge anywhere between ₹20,000 to ₹50,000 for the first year. Under Sebi regulations, the fixed fee is capped at ₹1.51 lakh per annum per client family.

Under the percentage fee model, a RIA can typically charge you anywhere between 0.5% and 1.5%, with 1% of AUA being the most common. Sebi regulations cap fees at 2.5% of AUA per annum per client family.

Then, there are RIAs who may follow a combination model—a flat fee for the first year followed by a percentage fee for subsequent years.

There’s no single standard method for determining the asset base for the percentage fee calculation. Some may take into account only the client’s liquid assets, such as mutual funds and exchange-traded funds (ETFs), while others may include both movable and immovable assets, given that the advice being offered may cover all of the client’s assets. As the client’s asset base changes with time, so do the fees.

A fixed-fee RIA may also consider a client’s asset base when determining the fee; however, it will still charge a fixed amount that remains unchanged from year to year. That being said, those with a relatively lower fixed fee (such as ₹15,000-20,000 per year) may not be willing to take on clients with assets exceeding a certain limit.

Note that many RIAs, irrespective of their fee model, do not disclose their fees on their websites. This information is shared with you only when you reach out to them. However, RIAs associated with Fee-Only India (FOI) clearly disclose their fees on their websites, along with details on what is covered under each fee. FOI is a group of 27 fixed-fee only RIAs that follow certain common rules. S. R. Srinivasan, founder of SriNivesh Advisors and a Sebi RIA, says that FOI members believe in recommending simple investment products (such as no direct equity and no PMS schemes) and not providing execution services to clients.

Executing transactions for clients

While RIAs associated with FOI are open to guiding their clients on how to proceed, for example, with starting a systematic investment plan (SIP) in a mutual fund, they don’t involve themselves in executing such transactions. On the other hand, percentage fee-based RIAs and many other fixed-fee RIAs help clients with execution.

According to the FOI investment advisors, their intention is to ensure that their clients handle these matters independently and don’t become dependent on them. But there are others who disagree. Deepesh Raghaw, founder at PersonalFinancePlan.in and a Sebi RIA, who helps his clients with mutual fund investment-related execution, said, “Execution is important for clients. We need to be client-focused, and sometimes clients find value in things (execution, for example) that we may not realize."

Vishal Dhawan, founder, Plan Ahead Wealth Advisors, a Sebi RIA, said that they help with the implementation of transactions across most of their recommended products. “People can make mistakes in implementing transactions, or sometimes, they may be too busy to do it. So, we need to ensure that this gets done for the financial plan to be put into implementation," said Dhawan.

Services beyond financial planning

Financial advisers we spoke with agreed that those charging a percentage-based fee are more likely to provide assistance with matters beyond financial planning. Take, for example, you need help with drafting a will or want advice on whether or not to create an HUF (Hindu Undivided Family) or other taxation matters, or even help with transmission matters after a family member’s passing. This may be crucial to executing a full-fledged financial plan, and it’s more likely that a percentage fee-based RIA will be up for the task.

Kalpesh Ashar, a certified financial planner and Sebi RIA who works largely on the fixed-fee model, had this to say, “While the fixed fee model is client-oriented, it may not be financially viable for the RIA to take up all these operational matters. If the ₹1.5 lakh a year limit is removed, I can serve clients with larger AUA and also take up operational matters, too."

Shortlisting an investment advisor

When it comes to shortlisting a financial adviser, many people rely on recommendations from family and friends. But there can be a better way to do this.

Melvin Joseph, founder and chief financial planner at Finvin Financial Planners, and a Sebi RIA, suggests that one start by selecting four to five experienced RIAs, read about them on their websites, and then speak with them to get a sense of what kind of clients they serve and if that matches their needs. “Choose the adviser you feel comfortable with and can afford from among the shortlisted ones," sums up Joseph. It’s essential to choose someone you trust, as you will be sharing a significant amount of personal and financial information with this person.

To summarize, if you wish to receive a wide range of financial advice and other related services, be ready to pay more, irrespective of the fee model. Don’t expect a RIA charging a low flat fee to take you on as a client if you have complex financial issues to be dealt with. The fee charged may not justify the potential time commitment involved.

But, if affordability is an issue, you can still choose from fixed fee RIAs for help with financial planning by paying as little as ₹12,000 to ₹20,000 in the first year, and lower, thereafter. By doing this, you can at least start planning your finances and also pick up some lessons along the way that may encourage you to enlist the services of an adviser more holistically.