In a world dominated by commissions / sales based model in which the Client is directly not paying anything, the pertinent question that comes from a Client is why should I be paying you a fixed fee? Why is your business model better for a Client?
Let us tackle this question from different perspectives:
1. Cost Savings:
This is a primary concern of a Client that why should he cut you a cheque when he has actually been paying nothing till now. It really is naïve to believe that a person has spent so many hours year on year with you, to earn nothing? Or some people so believe the company would have paid the agent but that is not from the capital you invested or from the premium you paid. The fact is when commissions are paid in a year or over the years, the amount is far more then what you would pay a fixed fee advisor.
Recently I got a senior citizen Client who wanted to shift from his agent but did not know about mutual funds. I curiously asked him, what made him want to do this at this age since I would not be offering him implementation service. He told me he had visited an AMC office recently and one of the staff told him he would save on commissions by shifting to Direct schemes and there his search began for a fixed fee advisor. He is now saving 90% of the commission he was paying. Kudos to him for taking the initiative at this age and putting in efforts to buy direct schemes on his own online.
2. Product options:
There are over 20 mutual fund houses and over 20 insurance companies out there. Number of Mutual fund schemes and insurance policies would be over 200. You think a commission-based advisor would provide you all these choices? Not at all. An insurance agent is allowed to only be an agent of one company. At best he or she will take agency of 1 or 2 more insurance agencies in one of their family member or friends name. A corporate is allowed a maximum agency of 3 insurance houses. So ask yourself if you really are getting a choice here. In case of a fixed fee advisor there is no association with any insurance company and hence we can recommend more options suitable to the Client.
In case of Mutual funds, a distributor is allowed to associate with any number of mutual fund houses and hence here you may think there is no bias or choice limitation. Well, mutual fund companies also give targets / slabs to their agents, which means if they get a certain amount of business they would get a higher commission. So then, these agents would keep pushing you toward schemes of a certain AMC to ensure they earn higher commissions or win an abroad trip by meeting their target (same for insurance agents) . Again a fixed fee planner would not have this dilemma of pushing / recommending schemes of a certain AMC. This essentially is unbiased advice i.e. the advisor has nothing to gain from the advise he is providing. By paying less you would end up getting a product more suitable for your needs.
3. Holistic approach
A fixed fee advisor would be evaluating your entire finances and your requirements to provide you any advice. For example, if you approach a mutual fund distributor or financial services institution and say I would like to invest INR 50,000 a month in mutual funds, they would be more than happy to start your SIPs which would start their commissions as well. If the same Client would come to a fixed fee advisor, the first question to the Client would be, why do you want to invest in mutual funds? Does investing in mutual funds fit within the risk profile and goals of the Client? It may turn out, the Client is better off investing in NPS or PPF or fixed deposit. But a person or institution that would earn commission from SIPs would never want to question the Client goals or requirements, he would just want more investments to be done through to earn commissions or achieve their targets.
So next time you want to plan your investments, do think about these points and then choose your planner.
Comments