Type of Financial Planner – As Per Regulators Eye

You might ask, why I am endeavoring to differentiate between Financial Planners. This is because the type of Financial Planner you engage, has a direct bearing on SCOPE OF ADVICE you are bound to receive.

Every day we hear about mis-selling happening at all levels, be it a bank or an individual advisor. How can you expect an industry to flourish if it suffers random attacks on the participating party? Hence regulator has clearly defined the types of financial planner and their scope of work which they can undertake for an investor.

It is a known fact that different financial advisors have varying skills, capabilities, knowledge level and business model. So when a bank employee, a wealth manager, an insurance advisor or any financial intermediate, with whatever name it calls itself, sells a product and earns revenue from the product maker, their lies a conflict of interest. The seller may push the product which may be offering higher revenues and intermediary may choose to hide the risk involved. Hence regulator have intervened to define the intermediary or the person who is advising the product.

The commission or the remuneration that an advisor earns on selling a particular product creates a push in the market. This sales push may not be aligned with the investor’s need. We are witnessing the same push that prevailed before 2008-09 in insurance industry and moment investors realized (read suffered) that, the sales have dropped now, even though the markets are soaring. But still we often meet people who burnt their hands with mis-sold insurance contracts.

Hence regulators are very clear- There will be 2 intermediaries:

• Advisor: This person will not receive any commission or remuneration from the product manufacturer like mutual fund companies or insurance companies. He needs to be registered with SEBI and has to follow all regulations and duties as laid by the SEBI.
• Distributor: Will only execute the transaction and will earn revenue from the product maker. Shall not take the advisory role and shall confine itself to selling single financial product (if somebody dealing in multiple products he needs registration). They need not to get SEBI’s registration but require to fulfill the licensing requirements as required by the product, for eg to sell mutual funds the distributor needs to have mandatory AMFI Registration Number.

A quick-chip here: These distinction is from the Regulator. But in reality market is mile away from what they think. I will very soon write a separate post on real financial advisors faced by the public at large.

Traditionally there was no regulation, hence no differentiation. But since SEBI has clearly divided the roles- the new financial advisors and old ones are existing with following Business Models:

• Fee-Only Financial Planners or Advisors: This is like a practitioner aligning with you closely to work on your finances comprehensively. Like a planner they set up your budget, goals, investments and future reviews of portfolio based on the 6 steps of financial planning concept. They are capable of advising on all aspects of personal finance. They get compensated by one-time fee initially at the time of start and then as agreed upon for review of your plan and based on assets they are managing with you. They don’t get any revenue from the manufacturer i.e. any mutual fund company or insurance or a loan company. Hence they do not get any direct commissions from anyone and hence their advice is not influenced by revenue.

• Fee-Based Financial Planners or Advisors: These advisors offer both- Advisory and Execution. Hence they earn fees from clients and commissions from the companies for which they sell products. These are generally companies and regulation requires that they keep an arm length distance between the two function so that the bias of commission does not shadow advice. Both verticals need to function independently and full disclosure need to be provided to investors.

• Execution Only: They do not charge their investors and their sole remuneration is the commissions that they earn. The core function is distribution of multiple products. They sell almost everything like insurance, equity investment, loan products etc. They do their own short listing and promote products based on self-appraisal. They may second products with their own research and execution platforms like online services or dedicated relationship managers etc. Majority of Banks, Individual Agents and Companies with presence in multiple states fall under these.

Which one will you choose?

The answer to this question lies in just 1 question itself:

Whose hands do you want to take care of your money?

I will not dwell more on this subject as I leave it for future interaction between us. Yes I will provide you an answer to it after a while as this has been marked as an unfinished task for me.

Till then keep sharing your views.