Fee-Only Financial Planning & Investment Advice...

  • Fee-Only Financial Planning & Investment Advice (for brevity, ‘Fee-Only Financial Planning’) involves an individual (the ‘Client’) explicitly paying a Fee-Only Financial Planner for advice.
  • A Fee-Only Financial Planner avoids conflict of interest by earning nothing else from your investments, from any other source

...is the Opposite of the Commission Based Business Model

  • Fee-Only Financial Planning is the opposite of the Commission Based Business Model (which is the universal approach that is followed in India)
  • Relationship Managers at Banks / Relationship Managers at large Mutual Fund Distribution companies / independent Mutual Fund Distributors / Mutual Fund Agents / Insurance Agents / most Online Investment website or app businesses, whatever one may call them, follow the Commission Based Business Model. Hence for simplicity, lets refer to all of them as Distributors
  • SEBI regulations specify that Distributors are just salesmen and hence they should not mislead clients by calling themselves Investment Advisers nor Wealth Adviser nor Wealth Managers nor Financial Planners. But Distributors have found a workaround to SEBI regulations and indirectly do this
  • The Distributor’s main role is to sell financial products to clients
  • Regulations allows Distributors to not be fiduciaries i.e. Distributors are allowed to push you to buy products that maximize the revenue of the Distributor
  • Since clients do not explicitly pay a fee a Distributor, the service appears to be free
  • However, the mutual fund or insurance investment products that the client purchases from the Distributor, deduct an additional significant amount each year from the client’s investments and pays it as an annual commission to the Distributor

Fee-Only Financial Planning over Commission Based Business Model - Simplistic advantage…

  • For a client, the simplistic advantage of a Fee-Only Financial Planning service is its significantly lower cost compared to what the client effectively pays a Distributor
  • For example, for a client with an equity plus fixed income / debt mutual fund portfolio of say Rs 7 crores, the client would effectively pay 10 times more to a Distributor compared to the average fees that I charge...
  • ...another way to think of this is that such a client would effectively pay an average commission to the Distributor of approximately 0.60% of the portfolio each year which is around 16.5% of the portfolio over 30 years (relevant article)
  • This is compared to my average fees for such a client which can be back-calculated to be around 0.06% of the portfolio each year
  • This illustration assumes that such a client renews the engagement with me every year over a period of 5 years. In reality, my existing clients renew the engagement far less frequently. So the effective cost for them is even lower

…and the more Important advantages

A Fee-Only Financial Planner does not sell any products to a client, and hence is on the same side of the table as the client. As a result, a Fee-Only Financial Planner:

  • Is free to recommend products that make the most sense for a client but do not pay any commissions e.g. a certain amount in bank fixed deposits for emergencies, ‘Direct Plans’ (i.e. 'Zero-Commission Plans') of Mutual Funds / NSE NIFTY Index Funds or NSE NIFTY Index ETFs
  • Is free to ignore products that pay high commissions to Distributors such as ‘Regular Plans’ (i.e. ‘Commission Plans’) of all active equity mutual funds e.g. ‘Regular Plans’ of equity mutual funds pay 7 times the commission compared to 'Regular Plans' of NSE NIFTY Index Funds
  • Is not required to be overly optimistic about any products and will therefore be more honest with a client about the drawbacks and advantages of such financial products, giving the client a clearer picture of the trade-offs involved
  • Is free to primarily focus on bigger-picture aspects, as detailed below

Bigger-picture aspects

Some of the bigger-picture aspects that a competent Fee-Only Financial Planner will focus on are:

  • Whether the client is saving enough for their critical needs and wants, and particularly, their retirement
  • Ensuring that the client is not relying on overly optimistic calculations, and making the mistake of retiring too early (relevant article in Mint)
  • Ensuring that the client is not taking on more equity risk than they can handle (relevant article in Mint)
  • Minimizing all investments costs e.g. even paying 0.3% p.a. more on a higher cost index fund (compared to a lower cost index fund) can be very harmful in the long-term (relevant article, see Part 2 of the article)