How to go about your financial planning – Fee only Financial Planner or Fee based Financial Planner!
A long time ago when I first started investing, I did not understand the difference between a Fee only Financial Planner and a Fee based Financial Planner. The catch here is that it was easy to get confused by these terms as they sounded so much alike and you would not really know what they meant.
For example, imagine you want to start planning for your retirement. You know what your monthly expenses are. You pick an easy compounding calculator online, feed in your monthly expenses and choose how you want to go about investing for your retirement. It is slightly more complicated than it actually looks.
Today, we have a vast number of products, from simple savings account giving 3% rates of interest every year to a complex derivative product or even cryptocurrency where your investment could grow 200% or plunge into the depths of nothingness. The right product is essential and if you are somebody who has no idea what differentiates one from the other, consulting the experts is critical.
This is where it gets murkier.
What is a Fee based Financial Planner?
Till recently, the best way to invest in any mutual fund or insurance policy, whether the riskier equity or the safer debt, was going through the mutual fund websites or calling your relative who is an insurance agent. The relative would come home or the mutual fund management company, or the Asset Management Company (AMC), will assign an agent or distributor, who would visit your place and help you choose your products… for free.
The ‘for free’ is the key here. None of us actually bothered to find out why somebody would go through the pain of travelling distances, spending time and money to give you ‘free advice’. One of the most important things I like to remember was taught by my grandfather to me when I was younger. He used to say “Nothing comes for free, not even the air you breathe.” So we need to question why somebody would give us free advice.
So, let us now ask the Question – Why would somebody give us free advice?
It is not free. But you don’t pay them, so who does? Well, they are paid agents! The insurance company or mutual fund agency they represent pays them. If you notice, every suggestion by the agent would somehow revolve around products offered by the company he represents. He basically helps you choose a policy or fund, and gets paid for the business he brings.
Next Question – On what basis is he paid for his effort?
It is generally not on the basis of an amount per customer, but an amount per rupee invested by the customer. For example, if you invest Rs. 1,000 in a Mutual Fund recommended by an agent, he would get 1% or such other rate as agreed with the AMC. Therefore, for every rupee you invest, 0.99 paise is only the actual amount invested. Sometimes, it gets a little more complicated as the financial services company pays the agent on the basis of the amount invested by the customer after taking into calculation his net returns.
Let’s look at it this way. I invest Rs. 1,000 in a mutual fund recommended by the agent. The Rs. 1,000 grows to Rs. 1,100 in one month’s time. In this case, the 1% would be calculated by the company on the 1,100 i.e. the amount of investment taken into consideration including the returns earned.
In any case, the agent who gets paid based on your investment into the product from the company, whether before or after returns, is called a Fee based Financial Planner. The entire Fee based financial planning industry is extremely tricky because there is a lot of misselling that happens by which the Financial Planner does not disclose his interests to his client. There have also been lots of questions asked about the ethics behind the agent-principal relationship.
Is there a chance that the Fee based Financial Planner will sell me a product I might not need only to increase his profits?
Answer – Absolutely
Is it true that all Fee based Financial Planners are to be avoided by us and there is nothing good that comes out of consulting them?
This is not an easy question to answer. It is a lot easier to handle this question after we look at the other types of Financial Planners.
What is the difference between Fee based and Fee only Financial Planner?
The difference between Fee Only and Fee Based Financial Planner is the keyword fee. Let us see
Fee Only Financial Planner
These are the direct opposite of Fee based Financial Planners, that is, they have absolutely no relationship with the Companies they suggest products of, receive no commissions from these Companies and are under no obligation to recommend one company over the other. So the obvious question in this case is…
How do Fee only advisors get paid?
We pay them! We, the investors, pay the Fee only Financial Planners a flat fee irrespective of the amount we plan to invest. It does not matter whether you invest a hundred rupees or lakhs of rupees, the fee paid is flat.how do they then make their money?
Why is this good?
There is obviously a conflict of interest when we think about how a Fee based Financial Planner functions. If you ask an LIC agent which is the best insurance company in the world, he will obviously say… LIC. Fee based Financial Planners are nothing but glorified employees of the companies they represent and have to, in all situations, only recommend products which are floated by their companies. Whether these products are good for you or not is only secondary. As long as the product is recommended, and you invest, they make their commissions.
On the other hand, a Fee only Financial Planner takes your considerations into mind before recommending a product. He does not owe anything to any financial services company and is unbiased. As you may well know, there are tens of or hundreds of these companies out there in the real world. Right from construction conglomerates like L&T who have gotten into the financial services business to proper banks like ICICI or HDFC, every one of them has a company that has one or more products floating under their name. Though all of them are under SEBI, IRDA or other regulatory bodies, it takes a lot of experience and good judgement to decide which ones are good and bad. The Fee only Financial Planner has all these products that he can choose from, and choose he must.
It is important to remember that a Fee based Financial Planner sells the same product under a ‘regular scheme’; while a Fee only Financial Planner sells it in the ‘direct scheme’. In most cases, if not all, the ‘direct scheme’ will have returns which are monumentally higher and definitely lower cost-based than the returns earned by a ‘regular scheme’. The difference between these two returns is the commission paid to the Financial Planner. Since there is no commission involved in a ‘direct scheme’ recommended by a Fee only Financial Planner, they have higher returns.
How much should I pay for a Financial Planner?
It is also a key to note that the choice between a Fee only Financial Planner and a Fee based Financial Planner, purely from a financial and economic sense, depends on the amount you plan to invest. When the amount you plan to invest goes up, it makes sense to shift to a Fee only Financial Planner .
For example, if I plan to invest Rs. 10,000 per year in a mutual fund and a Fee only Financial Planner charges a flat fee of Rs. 5,000. It would not make sense for the investor to choose a Fee only Financial Planner as the actual commission earned by a Fee based Financial Planner would only be 1% of Rs. 10,000 which is Rs. 100. This decision will obviously change as the value of investment increases.
The breakeven point would be Rs. 5,000. The moment the Fee based Financial Planner starts earning more than the amount charged by the Fee only Financial Planner, it would make sense from an economic point of view to shift to a Fee only Financial Planner. It is important to note that from an advice and conflict of interest argument, a Fee only Financial Planner is any day to be recommended over a Fee based Financial Planner.
An investor can also choose a ‘direct scheme’ if he knows which product to choose and understands the product completely. It is not mandatory that an investor has to go only through a Financial Planner. This is advisory and always recommended because of the amount of money in play over the long run. The power of compounding can be scary. What might look to us as just a Rs. 10,000 investment today could be worth lakhs of rupees in the future. Therefore, it would always be a wise decision to entrust your money to somebody you can trust completely… an unbiased person who does not suffer from a conflict of interest.
List of Fee only Financial Planners in India
Here is a list of Fee only Financial Planners in India.
Fee Only Financial Planner Mumbai
Melvin Joseph and Shilpa Wagh are Fee only Financial Planners in Mumbai.
You can reach Melvin Joseph through his website finvin(Finvin Financial Planners) and Shilpa Wagh through her website waghfinancials.
Melvin Joseph is based out of Navi Mumbai and Shilpa Wagh is based out of Mumbai.
Fee Only Financial Planner Bangalore
Soubhagya Kumar Patra is the Fee only Financial Planner/independent financial advisor in Bangalore. You can reach him through his website succinctfp.
Fee Only Financial Planner Hyderabad
Piyush Khatri is the Fee only Financial Planner in Hyderabad. You can reach him through his website sahastha.
Fee Only Financial Planner Pune and Nagpur
Chandan Singh Padiyar is the Fee only Financial Planner in Pune.You can reach him through his website padiyars
Swapnil Kendhe is the Fee only Financial Planner in Nagpur.You can reach him through his website vivektaru.
Fee Only Financial Planner Chennai/Coimbatore
Vikram Krishnamoorthy is the Fee only Financial Planner in Coimbatore. You can reach him through his website insightful.
Fee Only Financial Planner Haryana, Delhi, Noida and Ghaziabad
Sukhvinder Sidhu is the Fee only Financial Planner in Karnal, Haryana. You can reach him through his website finlifecare.
Jitendra Solanki is the Fee only Financial Planner in Delhi, Noida and Ghaziabad,. You can reach him through his website jsfadvisors.
List of Certified Financial Planners in India
You can visit to FPSB website and check the list of certified Financial Planners in India.
Best Fee only Financial Advisors in India
As Ashal Juhari says in AIFW, there is nothing called the best. You can decide, who is the Best Fee only Financial Advisors in India based on your requirements and comfort level.
Over the long run, the wisest move for a young earner is to appoint a Fee only Financial Planner and wait for compounding to weave its magic.