This article explains how SEBI Registered Investment Advisers (RIAs) earn their commissions and which options are best for investors. This article is based on information from his Ashal Jauhari and other RIAs who are members of my curated list.
SEBI only accepts two types of fees. A fee not exceeding 1.25L per year, or 2.5% of assets under advice per year. However, there are some nuances that readers should be aware of.
1. Flat Fee: RIA charges a flat fee to all clients regardless of net worth. NRIs charge a slightly higher flat rate. This fee cannot exceed Rs. 1.25 lakh per customer per year.
2. Hourly fee: All hourly rates are fixed. Fees are generally flat, as the amount of time spent on each client is usually about the same. This fee cannot exceed Rs. 1.25 lakh per customer per year.
3. Percentage of Net Worth (aka Advised Assets): A proxy for trail fees from regular mutual funds. The more assets you have, the higher the fees. This is obviously undesirable, as RIAs receive higher fees for offering the same advice to wealthy individuals. This fee cannot exceed 2.5% per year per client.
Note: Some clients mistakenly believe that getting a percentage of their assets for free means that the advisor can “work more” and earn a higher profit. This is naive and wrong.
4: Price according to complexity: Some RIAs charge a (flat) fee for the effort involved, often capped. This fee cannot exceed Rs. 1.25 lakh per customer per year.
5: Direct income from “other” products: Some (yes, many) RIAs “endorse” products that are not regulated by SEBI and make money from them. These include IRDAI regulated products such as life and health insurance, and RBI regulated products such as bonds and term deposits. Naturally, such RIAs should be avoided. There is no limit to such income.
6: Indirect income from mutual funds and other products: Many RIAs have a distribution “arm”. When clients approach them, we assess whether it is more profitable to advise the client and recommend direct mutual funds or direct them to the sales department and ask them to invest in regular mutual funds. There is no limit to such income.
So the RIA has two sets of clients. They receive a trail fee from their regular funds and a commission as a percentage of their assets for recommending a direct plan. This kind of her RIA should also be avoided.
should be clear to the reader Only those that charge a flat rate or hourly rate are the best choices. From a general point of view, this limits the number of eligible RIAs, but from an individual’s point of view, it makes the selection much easier.
Regular readers know that we maintain perhaps the oldest list of fixed-fee RIAs with no other source of income in the country. We started compiling this list even before the launch of the SEBI RIA Regulations in 2013. Over 1,000 of his people in our community are currently working with these advisors. Reference: 685 investors rate his SEBI registered fee-only advisor experience. And Are Customers Satisfied With Fee-Only Financial Advisors: Survey Findings.
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