Commission selling is financially more rewarding for advisers than the flat fee-only model of advisory. It also brings awards, rewards and appreciation for advisers within ever growing agent and adviser community. Flat fee only model which is in its nascent stage in India, offers none of this.
People like me, who are choosing flat fee only model over commission selling (where fee is not linked to size of the portfolio), are looked at as idiots. To some in the advisor community, we are like enemies, because our model is a direct threat to the commission model is working well for them since long. Increasing popularity of direct plans of mutual fund, online insurance plans and SEBI’s 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. And once an adviser is registered as RIA (Registered Investment Adviser), he cannot earn commission from any financial product. This means that a person who wishes to work as an adviser, must give up commission selling.
It is difficult for advisers who 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 a higher degree of competence which many advisers lack.
This is a new and untested business model. Most advisers are not sure if they will get enough fee paying clients. Even if client agrees to pay fee in the first year, getting him to pay fee from second year onward for review is tough. Most advisers have close relatives and friends as clients. It is uncomfortable to charge fee from such clients though the amount of work involved is same. Record keeping and compliance that comes with SEBI RIA is also something advisers are not used to. It is a question of very survival for most advisers while thinking about fee only model.
For 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 a crore. Annual commission on a balanced portfolio of 1 crore is upward of 50K. Commission is even higher for portfolios overweight on equity mutual funds. It is difficult to make client pay such high amount directly as fee. It works fine with commission model since investor is rarely aware about the commission he pays. Charging a rational flat fee means earning significantly less money from HNI clients than what adviser can easily earn with commission model. Therefore, moving to fee only model is an impractical decision for most established advisers.
Working on this untested business model demands conviction in it. And it is difficult to form this conviction for advisers because there is no acceptance for it in the adviser community they move in. This is as tough as changing the religion for many advisers. Even genuine advisers are in a dilemma whether or not to go for it.
There is one safe way out of this dilemma. Advisers can go for SEBI RIA registration, move to fee only model and transfer their commission business in the name of some close relative or friend. 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 fee only advisory.
I cannot say that I was immune to the issues discussed above. But I had my own reasons for moving to fee only model of advisory. I also came across a group of advisers working on this model who share my thinking about it, and that made things easier for me.
Fixed Fee model is a more dignified way of earning income in the financial advisory. Adviser is paid for the intellectual work he does. Compensation is in proportion to the work involved, nothing less, nothing more. This is unlike commission selling, where an advisor is paid less in proportion to his effort for small clients, and more in case of bigger clients (where it is difficult to justify the commission earned). Adviser need not use selling tricks and half truths to earn money. He doesn’t need to maintain ignorance of his clients to keep his commissions flowing. He need not fear client going to internet, doing his own research and ending up with options like direct plans of mutual funds and online term insurance plans where adviser commission can be bypassed. He can educate his client without fear of losing business.
No adviser choses flat fee only model because it pays him more. He choses it because it is a better option for his clients. He choses it because he values professional ethics and principles more than the money he earns. It is more honest and upright way of earning money in financial advisory. Therefore, even when other advisers around him earn more more for doing less, he can be indifferent about it; because earning more money is not the primary motive for him but doing “What is Right”.