It’s difficult to differentiate them both, since both help in investment decisions. This includes choosing mutual fund plans. Both are enrolled entities that are managed by different regulatory bodies. The Mutual Fund Distributor falls under the control of AMFI (The Association of Mutual Funds in India). SEBI (Securities and Exchange Board of India) controls the Investment Advisors.
Let’s first discuss the difference between mutual fund distributors and investment advisors.
An Investment Advisor- A group or individual who gives investment advice and financing. Even securities analysis can be managed in exchange for a fee. This could be via direct administration of client assets, or through written publications. A Registered Investment Advisor (or RIA) is someone who has enough assets to register with the SEC. Investor Advisors are also known by the name “Financial Advisors”. They evaluate the investor’s assets and liabilities and recommend an investment plan.
Mutual Fund Distributor These are individuals or entities that facilitate the buying and selling mutual fund units to investors. They make income by bringing in leads (investors) to invest in mutual funds. They are expected to understand the investor’s risk profile, financial situation and recommend suitable investment plans to suit their needs.
A commission does not mean that Mutual Fund distributors are allowed to sell the Mutual Fund scheme directly to investors to earn a commission. These regulations are extremely strict.
Let’s now discuss 8 factors that help you distinguish between Mutual fund distributors and Investment Advisors.
- Advice mode:
As we all know, a mutual fund distributor is an AMFI member. They are often the executors for your investments. An investor requests the mutual fund distributor buy/sell mutual funds plans on their behalf. The AMC then pays commission to the MFD. AMCs have been directed by SEBI to avoid mis-selling mutual fund plans. Use the trail-only model to pay only trail commission. You are not allowed to upfront pay any trail commissions, or give upfront commissions. The upfront payment would include sponsorships and contests. AMC does not pay commissions to these investment advisors. They charge a fee. This is a significant shift in the industry.
- Depositary duty
Advisors and distributors differ in that advisors are not bound by depositary obligation. Distributors are not bound by any such promise, but they can be committed to providing honest advice to investors.
- Examen and certification
Both mutual fund distributors and investment advisors have to pass a different exam. The National Institute of Securities Market (NISM) will issue a valid certification for MFD. Clear the certification exam NISM Series V: Mutual Fund Distributors Certification Examination. To become an Investment Advisor, one must pass both levels 2 and 3.
- NISM-Series-X-A: Investment Adviser -Level 1
- NISM-Series-X-B: Investment Adviser -Level 2
A certification in financial planning is required for mutual fund advisors.
- Advisors can only advise, but not distribute
A MFD can help you choose the best mutual funds. They help investors understand mutual funds and the risks involved. They provide information and support to the investor regarding mutual fund investments. They ask the investor to make a mutual fund investment. They continue to distribute the plan for mutual funds. They are not able to distribute mutual funds but can give investment advice. Their job is to provide advice. The distributor will make sure the investor invests in mutual funds after that.
- Duties differentiation
The distribution of mutual funds is the main focus of a mutual-fund distributor. The advisor is responsible for many other tasks, in addition to the duties of a mutual fund distributor.
- Assisting investors to change their portfolio
- Evaluation of risk-taking capacity funds
- The right investment option
Direct plan vs Regular plan
Investors will be offered a regular plan by a distributor of mutual funds and asked to invest. Investment Advisors advise investors to invest in direct plans. The mutual funds were previously purchased through distributors. In January 2013, SEBI ordered AMCs to start direct mutual fund plans. Advisors can now advise investors and help them invest in direct mutual funds plans. The expense ratio for direct plans is lower than regular plans. While distributors might be enticing you to take up regular plans because of their commissions, advisors won’t.
- Consider the differences in their levels of collecting relevant information.
Good financial planning starts with understanding the need to gather general information about your finances. You must ensure that the person you trust with your finances is open to asking important questions. You should be open to discussing your income, goals, and expenses. Assets, liabilities, tax status, and other pertinent information. You should also be able to get need-based, not product-based, advice from them. MFD will likely discuss your needs with products they are commissioned by to market. Financial advisors are expected to provide impartial advice that meets your needs.
- Discussion of the factors of risk and return
The advisor will usually discuss this factor in a much more detailed manner than the Investment advisor. The advisor will discuss mutual fund risk factors, such as high, low, medium, and severe. He will then review past performance of mutual fund schemes. Then, he will recommend that you invest in the plan. An investment advisor will request that the distributor facilitate the investor in investing in the mutual funds plan they are interested in to meet their financial needs. Your risk appetite is what an advisor will be interested in. Setting the right expectations with regards to investment returns is also important.
It is difficult to determine whether a mutual fund distributor or advisor is needed. Both can be an important source of information for mutual fund investments. According to mutual fund regulation, all persons, including companies, who receive AMFI certification number ARN are mutual fund distributors. This includes the most senior to the youngest. They need advice on many aspects of mutual fund distribution, including asset allocation, tax planning, scheme selection and asset allocation. Investors have the option to directly contact distributors or seek advice on mutual funds.