Commission selling of financial products is financially more rewarding for advisers compared to the fee only model of advisory. In commission selling, advisers get paid more for doing significantly less work compared to the fee only model. It also brings awards, rewards and appreciation for advisers within ever growing agent and adviser community. On the other hand, fee only model, which is in the nascent stage in India, offers none of this. In fact, people like me, who are choosing fee only model over commission selling (and that too fixed fee model where fee is not linked to the size of the portfolio), are looked at as idiots. To some in the advisor community, we are like enemies, because the model we work on, is direct threat to the commission selling model, that has been working fine for them since long. SEBI’s increasing push for fee only model is also making the threat real.
SEBI came up with Investor Adviser regulation in 2013. It says that, only advisers registered with SEBI, can provide investment advice. But once an adviser gets registered, he cannot earn commission from any financial product. This essentially means, that any person who wishes to work as an adviser, must move away from the greener pastures of commission selling.
It is difficult for advisers who have worked on commission model all their lives, to suddenly move to the fee only model. Fee only model is difficult to execute and offers lower monetary compensation. It also demands higher degree of competence which many advisers lack. This is a new and untested business model for advisers. Record keeping and compliance that comes with SEBI RIA (Registered Investment Adviser) is something advisers are not used to. Most of them are not sure whether they will be able to get fee paying clients. Even if client agrees to pay fee in the first year, getting him pay fee for renewal from second year onwards is tough. Most advisers have close relatives and friends as clients. It is uncomfortable to charge fee to such clients though the amount of work involved is the same. And therefore, the first thing that comes to the mind of most advisers while thinking about fee only model is survival.
In case of bigger and established advisers, survival is not an issue, but an equally strong factor goes against moving to the fee only model. These advisers have many HNI (High Net Worth) clients having Mutual Fund assets more than 1 crore. Annual Mutual Fund commission on a balanced portfolio of 1 crore is at least 50K. The commission is even higher for portfolios that are overweight on equity mutual funds. It is difficult to make clients pay such amount of money directly as fee. It works fine with commission, because client is never aware about the commission he pays in most cases. Charging a rational flat fee means earning significantly less money from HNI clients than what can easily be earned with commission model. Moving from higher earnings per client to lower earnings with significant increase in the amount of work is impractical decision for most advisers.
All these reasons make moving to fee only model an immensely tough decision for both smaller and bigger advisers. Moving to this untested business model requires complete conviction in it which is difficult to form for advisers also because there is no acceptance to it in the adviser community they move in. This is probably as tough as changing the religion for most advisers. Even genuine advisers are in dilemma whether to go for it or not.
There is one safe way out of this dilemma. Advisers can go for SEBI RIA registration, move to fee only model and take MF and insurance agency in the name of close relatives or a close friends. This solves the problem since both commission and fee can be earned at the same time. Most advisers would prefer this route instead of the cleaner route of fee only advisory.
I cannot say that I am immune to the issues discussed above. But I have my own reasons for moving to fee only model of advisory. Fortunately, I also came across a group of advisers working on this model who share my thinking about it.
Fixed Fee model is more dignified way of earning money in the financial advisory. Adviser gets paid for the intellectual work he does. The compensation is in proportion to the work involved, nothing less, nothing more than what he deserves, unlike in case of mutual fund, where advisor gets paid far lesser in proportion to his effort in case of small clients, and far more in case of bigger clients, where it is difficult to justify the commission earned. It puts adviser in the position of strength. Adviser doesn’t need to maintain ignorance of his clients to keep his commissions flowing. Adviser can educate his client as much as the client wants to get educated without fear of losing business. He doesn’t have to fear client going to internet, doing his own research and ending up with options like direct plans of mutual funds where adviser’s commission can be bypassed. Adviser and client both are on equal footing. Adviser doesn’t have to swallow his pride to get or keep business. Here adviser values his professional ethics, principles, dignity and honour more than the money he earns. This honest and upright way of earning money is also lighter on his heart. He is never stressed out for he earns clean money. He doesn’t need to use selling tricks, half truths and sycophancy to earn money for he knows what he offers is in the better interest of his clients. What other advisers are doing doesn’t bother him. Even when other advisers get paid more for doing less work, he can be calm and indifferent about it because earning more money is never the primary motive for him but doing “What is Right”.