Know how your investment advisor charges you before picking the right one

As an investor, how do you then judge a financial planner based on the fees he/she charges? “The fee structure may have different considerations. Someone might charge over ₹1 lakh in the first year because he wants to deal only with a specific category of clients. Another planner may charge below ₹20,000 in the first year as he is in the process of building a clientele. Both could be equally good," said Suresh Sadagopan, founder of Ladder 7 Financial Advisories and an RIA.

Most advisers believe that instead of focusing on the fee of an adviser, investors should shortlist a few and sign up with an RIA whom they could trust the most.

“The initial trust is all that matters. Investors need to open up entirely about their financial conditions. Only if they trust an adviser, can they be forthcoming about their issues," said Chandan Singh Padiyar, a Sebi-RIA.

When to sign up: There is no straight answer to when in life one should avail the services of a financial planner. It depends on the knowledge, understanding and the time a person can spend on planning and managing his/her finances.

Understand the fee structure: The Securities and Exchange Board of India (Sebi) has capped the fees advisers can charge their clients. If an RIA has a flat fee structure, he can charge up to ₹1.25 lakh. If the fee is based on the percentage of the assets under advice (AUA), it can be a maximum of 2.5%.

Most advisers follow different fee structures depending on the client. The fee is higher based on the client profile, complexity and the efforts that they would need to put in to create a financial plan and to fine-tune it.

The lowest fee that Padiyar charges client is ₹15,000 in the first year. “The base fee is for bachelors. It is higher for married couples where one spouse is working and even higher where the husband and wife are both working. In such cases, the fee can be up to ₹36,000 in the first year," he said.

Fees for Sadagopan starts at ₹40,000 and goes higher depending on the complexity of the portfolio.

Some planners charge a fee only for the financial plan initially, which can be between ₹15,000 and ₹25,000. If an investor wants to engage them and help in implementation of the plan, the fee is higher.

From the second year onwards, advisers either charge a flat fee or a percentage of AUA. Those who charge a flat fee, typically, charge a lower amount than the first year.

Padiyar, for example, charges 50% of the first year’s fee. Sadagopan, in turn, charges a percentage of the AUA.

Investors must be cautious about the fees of RIAs, as it is possible that an adviser charges a low fee in the first year, but from the second, raises it much higher as he is charging a percentage of the AUA. Therefore, check this before signing up.

Sebi can decide on adviser’s fee

Purnartha Investment Advisers had challenged Sebi’s powers to cap the fees investment advisers can charge their clients in the Bombay High Court.

The company also contested that Sebi regulating fees is unconstitutional. It breaches the advisers’ fundamental right to practice a profession or business of choice.

The court ruled that Sebi Act allows the regulator to prescribe fees that investment advisers can charge. It also said that such regulations do not breach fundamental rights. They are essential measures for the protection of investors and the development and regulations of the securities market.

RIAs cannot ask for referral fee

iFast Financial India Private Ltd, a financial services platform, asked Sebi to clarify some aspects of its regulations concerning registered investment advisers (RIAs).

It asked the regulator if an adviser refers clients to another party, can he charge a referral fee? For example, can an adviser refer the client to a chartered accountant or an overseas adviser?

According to Sebi, RIA regulations don’t allow advisers to avail of such referral fees. “An IA can undertake an activity of providing investment advice for a consideration, and the same cannot be construed to include referral fees as envisaged (in the query)," the regulator said.