In the past few years, the regulator has been nudging advisors to follow a fee-based model. SEBI made its intensions clear in the Investment Advisory regulation of 2013. Though it has not yet made it compulsory for all advisors to be RIAs, some suspect such a move might not be far off.
In this article, we look at the fears about transitioning to a fee-based model.
#1 Time Consuming
One of the most important concerns advisors have about the fee-based model is the amount of time they will have to spend to set a new process in place. Suresh Sadagopan says that while all good things in life take time, the amount of time an advisor needs to transition from one model to another may vary from person to person.
“I would advise IFAs to improve their knowledge base first. Only when they are able to show the value they add to the financial planning process, will they be able to justify any fee they propose o the client,” he says
Talking about how he was able to transmission his business, Mr Sadagopan says, “Initially I set about upgrading myself. I got the necessary certifications and improved my knowledge base. Then I explained to my clients, how by giving up the commission model and relying on fee, they will be able to benefit from my services. I made it very clear from the start that they will be saving more by hiring me than by doing it on their own. I started out by charging a nominal fee and then gradually increased the fee structure as my business grew.”
#2 Expensive for clients
Another concern that pops up regarding a fee-based model is that investors might find such a model expensive and move on to cheaper alternatives. Kavitha Menon a Mumbai based RIA feels that it is the advisor’s duty to point out to the client that when they go for a distributor model they are indirectly paying a portion of their earnings to the distributor.
“If we compare the cost of a regular plan, with that of a direct plan it will help the client understand that a portion of his earnings is anyhow going to the distributor. But as a fee-only advisor you will have no conflict of interest and will be able to give him unbiased advice,” she says.
#3 Clients might leave
Advisors often fear that they may lose their existing client base if they shift to a fee-based model. Jayanth Vidwans of Vidwans Financial Planners feels that if advisors make themselves invaluable to the client, he will not mind paying a fee.
“Advisors must be able to convince their clients that the quality advice you give them as a certified professional is different from the advice they might get from a normal distributor. You must make him realise the savings generated and how as a fee-based advisor your only concern is the clients’ financial wellbeing. Once, you have established all this clearly, your client will not leave you,” he says
Recalling his personal experience, he says that most of his clients did not have a problem transitioning over to a fee-based model.
#4 Will my advice change.
Another doubt most advisors seem to have is: will their advice implementing a fee-based model be different from the advice they give now?
Lovaii Navlakhi, International Money Matters Pvt Ltd says, “As long as advisors continue to give advice keeping only their client’s needs in mind, there will be no difference in the advice they give. In fact by choosing a fee only model, they will be able to advice their clients without the restraints of a commission based model.”