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There are more than 4 crore unique mutual fund investors in India, but only 1,000 SEBI Registered Investment Advisers (RIAs).
Shockingly, the number of SEBI RIAs has decreased over the last few years despite the regulations introduced in 2013, and in this write-up, I want to discuss why.
First, a quick background:
SEBI introduced RIA regulations in 2013 to address the challenges investors face from conflicting advice – agents want to maximise commissions, while investors want the right advice, and most of the time, their interests are not aligned. The identified root cause is the commission-based revenue model.
Regulations prohibit SEBI RIAs from earning commissions by selling products. Their only source of revenue must be the fees received directly from clients for investment advisory and value-added services. Therefore, SEBI RIAs recommend investments in zero-commission investment options like direct plans of mutual funds and advise investment strategies/structures that they believe are best suited to the client’s requirements.
The major advantages for clients dealing with RIAs are:
1. Receiving advice that is customised, professional, and suitable to the risk profile and return objectives of the client, resulting in higher returns optimised for risk.
2. Never having to worry if the recommendations are influenced by any factor other than the client’s own interest.
3. A transparent fee model that reduces the fee percentage with an increase in portfolio size, which is not the case in a commission-based distribution model where the fee percentage remains constant despite an increase in portfolio size. The RIA model ensures significant savings on commissions for clients as the portfolio value goes up.
4. Higher accountability for the fee-based advisor, as his/her services are retained only as long as value is delivered.
Even though SEBI RIA is a client-centric, unbiased, and transparent model, RIAs are still low in number because of the challenges posed by investors. Those investors who were paying hefty commissions to agents without realising it start negotiating hard when it comes to paying fees, despite saving on commissions and getting better advisory.
In the case of commission-based models, commissions are deducted from investors’ portfolios and paid to agents. Investors don’t see this and, thus, don’t question it. However, when it comes to paying a fee directly to the advisor, even if the fee is lower than the commission they were unknowingly paying, it suddenly becomes a substantial amount. Here, the difference is only psychological, but the impact is real.
Investors start negotiating, creating a narrative that investors don’t pay fees, and that’s why advisors who are inclined to work on a transparent fee-based model eventually choose a commission-based distribution model, where they don’t have to negotiate with clients, get commission payouts on time, and have to deal with much lower compliance.
Running a wealth advisory firm that delivers quality advice is expensive. Hiring talented advisors/staff, running operations, and managing compliance cost a lot. Haggling over fees by investors only pushes smart and sincere people towards commission-based models, to the detriment of the entire investor community.
A few investors understand this, but we need a larger percentage of investors to recognise the advantage of fee-based advisory over a commission-based distribution model. This will encourage more talented people to become SEBI RIAs, resulting in a better work culture in the wealth management industry.
At Truemind Capital, we help people achieve peace of mind by managing their financial planning and investments in India and globally diversified portfolios.
For an introductory call, reach out to us at: https://www.truemindcapital.com/contact-us
