Need comprehensive advice on financial planning? Go with an RIA

Investors need to think hard about the services they need before deciding which of the two entities to engage with
The Securities and Exchange Board of India (Investment Advisers) (Amendment) Regulations, 2020, will come into force from October 1. These regulations have clearly demarcated the activities that registered investment advisors (RIAs) and mutual fund distributors (MFDs) can undertake. Investors need to think hard about the services they need before deciding which of the two entities to engage with.  

What will change? 

The regulator has asked for client-level segregation. If you avail of advisory services from an RIA, then you cannot avail of distribution services from the same entity or from his family member. On the other hand, distributors cannot advise you on your financial goals. They can only sell MF schemes. 

Existing clients need not sell or switch their existing investments to comply with these regulations. But for future needs, they will have to use separate entities for advice and distribution. 

Whom should you go with? 

Whether you go with an RIA or MFD should depend on the services you need. “If an investor wants comprehensive financial planning, including risk profiling and regular portfolio monitoring, then an RIA is the best option. But if you are looking only to invest in MFs, you may approach an MFD,” says Pankaj Mathpal, founder and chief executive officer (CEO), Optima Money Managers. 

Adds Vishal Dhawan, founder and CEO, PlanAhead Wealth Advisors: “Those looking for goal-based planning or advice on multiple products should go to an RIA.”  

The execution issue

If you avail of an RIA’s services, you will have to figure out how to execute the advice. RIAs can help their clients with execution, but must not make money from execution. You could use the services of one of the platforms that sell direct plans of MFs. If you take advice from an RIA and then go to an MFD for execution, that will be expensive, as the MFD will sell higher-cost regular plans to you. 

The cost factor

RIAs can charge a fee that is either a percentage of the assets under advisement (AUA) or a fixed fee. The former can be maximum 2.5 per cent of the AUA, while the latter can go up to Rs 1.25 lakh per annum. 

“Most RIAs work on AUA basis. Generally, they charge much below the cap set by Sebi. The fee could be as low as 1 per cent of AUA,” says Dhawan.

If you go to an MFD, you need not pay from your pocket as he is remunerated by the fund house. The commission varies from one scheme to another. Bear in mind that because of the way the MFD is compensated, there is an inherent conflict of interest — he could be tempted to sell you products from which he can earn a higher commission. 

What should you do? 

Those looking for comprehensive advice should opt for an RIA. However, such people will need to be savvy enough to execute the advice on their own. Execution platforms, too, have a cost. Inv­estors with small portfolios may go to an MFD initially if they need hand-holding (savvy ones can go directly to a platform). Later on, they may switch to an RIA once their need for advice grows.

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