By helping investors with the paperwork and process, mutual fund distributors assist them in transacting in different mutual fund schemes. They cannot make recommendations about the mutual funds to invest in, and they don’t do risk profiling or suitability analyses of their clients. Registered with SEBI, investment advisers assist clients in financial planning and provide advisory services. Each receives a fee for the services they provide clients.
It is common to use mutual fund distributors and investment advisers interchangeably, without much consideration of the roles given to them by SEBI. The new consultation paper by SEBI, released January 2, 2018, clarifies the roles and makes it easier for investors decide what they want to pursue. According to previous guidelines, mutual funds distributors have been registered with AMFI (the industry body for mutual fund mutual funds), while investment advisors, also known as Registered Investment Advisers, (RIAs), have registered with SEBI. The commissions they earn from mutual fund distributors allow them to make a living selling funds to investors. They don’t usually offer mutual fund advice, but may provide some advice that is ‘incidental in nature’ while completing services related to transactions.
An investment advisor must profile their customers. This includes looking at their financial situation, psychology and current assets, liabilities, financial plans, and then recommending financial products that will help them complete their financial plan. They should not be restricted to selling mutual funds, but they are expected to make sound financial advice for their clients’ best interests.
SEBI’s new consultation paper proposes that mutual fund intermediaries register compulsorily as either Mutual Fund Distributors or RIAs with SEBI. Investors must be aware of the differences between these roles and choose which service they would prefer. Your ability to achieve your long-term goals will depend on how well they can help you.
A mutual fund distributor can be a great resource for you if you’re a skilled investor and are comfortable with mutual money. They will help you navigate the transactional aspects of your investment, while you make your decision about where to invest your money. You would also need to spend time researching the funds before you invest your money. You will need to maintain a track of your portfolio, and rebalance it as needed. You will receive a trail commission each year from the fund house until you have invested in that fund. This commission is paid by the fund house and comes out of your fund’s expense ratio. SEBI has set a cap on the expense ratio of different types of funds. AMCs have the option of deciding how much commission they want to pay to distributors. The commission structure does not affect you.
If you don’t have the time or are not knowledgeable about mutual funds and financial plans, a RIA can help you. They will conduct a situational analysis to assess your financial and psychological status, create a risk profile, and then design a holistic financial plan. This plan will include a mix assets that complement your financial capital and human capital. Your future earnings are the present value of your human capital. Because they have a longer time frame to build financial capital, younger people tend to have more human capital.
A professional RIA will consider your human capital and the financial capital that you have in order to recommend a financial planning. Your RIA will keep in touch with your to discuss any changes in your life and to adjust your portfolio accordingly. An advisory fee will be charged by the RIA. Keep in mind that the advisory fee charged by an RIA is higher than the expense ratio you will have to pay. The RIA can provide investment advice, but you have the option to either act directly on it or to a distributor of mutual funds to assist with the transactions.
You must find out the AMC commission paid to mutual fund distributors so that you are not being pushed to buy one fund over another. This will prevent conflicts of interest.