TLDR: The best financial advisors in India are of the fee-only kind. Read on to know what this approach is about. If you prefer to directly skip to the list, click here.
What does a financial planner or financial advisor do?
A financial planner helps you invest your money and helps you get a hold on your finances. But finding a good financial planner in India isn’t easy since 98% of them have a conflict of interest, since they work on commissions.
What are commissions?
It’s basically a percentage of your wealth which is being given away to a middleman. This middleman could your financial advisor, de-mat account provider or anyone who for some reason is offering you a ‘free’ service.
So how do you find the best financial advisors in India?
As per SEBI, there are currently a total of 1032 registered financial advisors in India. And so far, I’ve come across about 25 fee-only financial advisors.
Considering the fact that almost 98% of financial planner in India are commission agents, you need to know about commission-free investing and the impact such products have on your overall wealth. This post helps you understand all of that.
Who are fee-only, or commission-free financial advisors?
Commission-free financial advisors are advisors who do not earn any money as commissions. When they invest your money, they only suggest Direct plans of mutual funds. Since they don’t act as middlemen, they can’t be swayed by the lure of products which provide them higher commissions.
Why are they rare? And how are they different from other financial advisors?
To understand this, you’ll first need to first understand what Direct plans are. If you know about Direct plans already, then you could just skip to the last section of this post.
What are Direct Plans?
Like any other financial product in the market, mutual funds too contain middlemen. And since a middleman is involved, you lose a percentage of your wealth to them in the form of commissions.
Direct plans of mutual funds on the other hand, are a way to invest directly with the company which runs the mutual fund. (These companies are also called as AMCs or Asset Management Companies). Since no middlemen are involved, you don’t lose money on commissions. Consequently, your mutual fund investments generate more wealth. You could call them a ‘no-broker’ way of mutual fund investing.
This middleman could be your De-mat account provider, your bank relationship manager, your financial advisor or a fancy new mutual fund portal you came across online.
When you invest through them, you invest in what are called as Regular plans. And these always contain a middleman.
The word Regular is a rather mis-leading adjective if you ask me. They should be ideally be called as ‘Commission based’ plans.
Until 2013 ago, it was near impossible for investors to invest directly. Like most real estate rental transactions in cities like Mumbai, there almost always had to be a middleman. And this middleman needed to be paid year after year, even if you hadn’t changed your house or availed any of their services.
But in 2013, as per SEBI’s directive, all AMCs were mandated to provide a way for investors to invest directly. So every mutual fund now has a Regular variant and a Direct variant.
How much of a difference does a Direct plan really make?
Simple math; if you invest just 8000/- per month for 20 years, and your mutual fund provides a return of 13% per year, investing in a regular plan would have made you 91.6 Lakhs. Whereas the direct plan of the same fund would’ve given you 1.05 Crores.
That’s a difference of over 14 Lakhs.
Here’s the same example when charted for 15 years.
This difference was created due to just a 1 or 1.5% increased return provided by the Direct plan. This is the staggering impact which tiny, insignificant numbers have on your wealth.
For example, Reliance Small Cap fund(Regular) provided a 5-year return of 38.74%, while Reliance Small Cap Fund(Direct) provided 40.15.
Similarly, ABSL Tax Relief fund, which is quite popular among tax-saving plans, provided a Regular return of 25.7%, and a Direct return of 26.8 over a 5 year period.
Now, I know many investors who invest more than a Lakh per month in mutual funds. And historically, there have been plenty of funds which have provided more than 28% return over a 5 year period. Redo that math with these numbers and the difference will drop make your jaw drop.
I’m not going to beat around the bush more, since even my earlier post (which you can read here) spoke about the virtues of Direct plans. The summary being that Direct plans outperform their Regular counterparts by a huge margin.
If Direct plans are good for investors, have commission-based plans at all?
This might sound like a weak logic, but commissions are necessary. Without commissions, agents have no incentive to sell a product. Would you sell a product which makes you no money whatsoever?
So in a way commissions in mutual funds are necessary since it incentives distributors and advisors to promote and sell them. Without incentives, mutual funds wouldn’t have been as popular as they are today. So this is a chicken and an egg problem.
The problem is that these commissions are going out of hand.
How do commission-making financial planners in India justify their haul?
I’ve had acquaintances whose financial advisors had told them that many funds do not have Direct variants. That’s a straight out lie. But it was nevertheless said.
The more conventional justification has been that they provide valuable advise and guide the less knowledgeable investors in the right direction, and hence are deserving of commissions, however large they might be.
This would’ve been a perfectly valid argument, if not for the case that SEBI, the regulatory body which looks after investor’s interests probably for the first time ever, recently said that it is very concerned about the commission issue. In FY 2018 alone, an incredible 8500 Crores was earned by distributors as mutual fund commissions.
And it is for this exact fact that several financial advisors/distributors are happy to give their services for free. They’ll make way more in commissions than what you would have ever agreed to pay.
Clearly when you read all of this, it’ll beg the question. How do you know you are not being misled? If you were a salesmen, wouldn’t you want to sell more of the product which provides you more income?
So how do they make money?
They charge a fixed upfront fee. And that is their primary or perhaps sole source of income. But what works in your favor, is that once this fees is paid, they only have your interests in mind.
Having interacted with several of the advisors on the list, I can assure you that what they charge as up front fee is completely justifiable, since you stand to lose lakhs or even crores otherwise.