Home / Money / Personal Finance /  How to choose a right financial advisor

Consider a young professional — Let’s call him A — who can shell out 10,000 per month for investing in mutual funds (MFs). Should he invest through a registered investment advisor (RIA) or a mutual fund distributor (MFD)?

RIAs charge a fixed fee for the investment advisory and A may not be in favour of this either because he cannot afford it or for some other reason. RIAs also charge a renewal fee to review the financial plan every year.

With MFDs, there will not be any upfront charges for the investor. They get paid in trailing commission from the asset management company (AMC), which, in turn, collects this commission from investors themselves. Since there is no upfront charge, it may entice A to invest through an MFD. However, A will still be paying MFD, albeit indirectly, and for the period he stays invested in the MF scheme.

RIAs help you invest in the direct plans of a MF scheme, while MFDs sell regular plan of the same MF scheme. The commission on regular plans is higher than that on a direct plan.


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Which route is better, you wonder? Let’s get to the hardcore numbers.

RIAs usually charge a fixed-fee of 20,000 to 35,000 per annum in the first year and a lower amount next year onwards as renewal fee. If an RIA charges 20,000 in the first year and 10,000 thereafter, then total fees paid (including GST) would amount to 70,800 for five years. Assuming that annual returns of 12% on 10,000 invested monthly in a systematic investment plan (SIP), the post-fee returns would come to 7.54 lakh for the holding period of five years.

If A invests in the same MF scheme through an MFD, we may assume annual returns of 11% on 10,000 monthly SIP. The remaining 1% each year will go to the MFD in trailing commission. So, the regular plan yielding 11% return per annum for five years will amount to 8.02 lakh.

Clearly, investing through the MFD route appears more profitable in a five-year period. However, this scenario changes drastically the longer you hold the investment.

If you stay invested through an RIA for the next 20 years, the post-fee returns would come to 97.43 lakh compared to 87.35 lakh in case of an MFD, a difference of a whopping 10 lakh. (See accompanying chart.)

Should everyone invest through RIAs then? Note thatthere are not enough RIAs to cater to the growing number of MF investors. Data from market regulator Sebi show that there are just about 1,300-odd RIAs. Individual RIAs can only onboard 150 clients. Moreover, the compliance procedure is too rigorous which makes the RIA model unviable unless high-net-worth individuals with a large AUM (asset under management) size are your clients.

“RIAs may prefer onboarding new clients each year over renewing the relationship with existing ones because renewal fees from existing clients will be lower and cap their revenues at a certain level," says Niraj Dugar, co-founder and CEO, Holistic Wealth.

Besides, individual RIAs only suggest suitable products. The investment part has to be executed by investors. There are some fintech platforms such as Kuvera, Groww, and Paytm Money which have RIA license and sell direct MF plans, but they will not help with investments directly.

“If you are hi-tech and know which products to buy, you may save money and invest through tech-enabled platforms. However, hi-touch and a low-on-tech person should prefer RIAs. Once you know where to invest, you may execute it through fintech platforms," says Vivek Rege, founder and CEO, V R Wealth Advisors Pvt Ltd.

What investors should know

Holding an RIA license does not guarantee that the RIA will be ethical. Similarly, not all MFDs will have vested interests. The person advising you should be competent enough to handle your money. “The most important aspect of choosing financial planners is their background. Go for an advisor who has a strong research background and avoid the ones with banking and sales experience. How much AUM an MFD or an RIA handles does not guarantee that they are good in research," says Dugar of Holistic Wealth.

Ask relevant questions. Please check if the distributors are listed on the AMFI website and RIAs on the Sebi’s website, suggests Rege.

Mint take

Where the amount involved in SIPs is small, you may start your investment in index funds through platforms that offer you direct plans. Beyond this, if you need complex advisory, you should go to an RIA. An RIA can not only suggest MF products but also take care of aspects such as tax and estate planning and cash-flow and risk management. If you are investing for a specific goal and only want advice on MF investments, choosing an MFD would be a better option.

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