It’s been long time since I was thinking of writing an article on Financial Advisor fees structure, cost and charges in India. This is a growing market that has come up in the recent past and most of us do not have that the knowledge around how much one should pay and is it worth paying the fee? What is the fee structure for first year and subsequent years?
I tried searching for the number of financial advisors in India and trust me, the list is huge. There are more than 1000 SEBI registered investment advisors in India. It was very difficult to analyze the fee structure for everyone. Also, it was quite challenging to determine if they are fee based or fee only planners. This task is now easier with the use of Fee-Only Financial Planners List to help analyze and and check the first year and renewal fee for subsequent years.
I started writing a 15-article series on 31st March 2020 about how to become a Do IT Yourself (DIY) investor? This is the 15th article of that series. If you’ve missed any previous article, no worries, you can read it here.
- Emergency Funds And How To Invest It?
- Importance Of Term Insurance And Amount Of Cover
- Health Insurance Beyond Corporate Cover
- How To Choose Best Personal Accident Policy?
- 5 Financial Formulas In Excel For Personal Finance
- Risk Profiling And Asset Allocation
- How To Define Your Financial Goals?
- Child`S Education And Asset Allocation
- Retirement Asset Allocation – By Age, Risk Tolerance Or Goal?
- Fire Retirement In India With Calculator
- Creating Debt Portfolio For Your Investments
- Creating Equity Portfolio For Your Investments
- Download Sample Financial Plan in PDF
- Portfolio Rebalancing- Shifting from equity to debt
Financial Advisor Fees Structure
Financial Advisor fees structure is primarily divided into two parts:
- First Year Fee- This fee is charged by the financial planner when an individual approaches an advisor for financial planning the very first time. Generally speaking, the fee is higher in the first year. The financial advisor needs to spend a considerable amount of time to understand the financial situation of the client before being able to come up with a robust financial plan.
- Renewal Fee (2nd year onwards) – At this stage, the financial advisor knows the situation of client and it is easy to review the financial plan. Any adjustment in goals, changes in asset allocation if goals are approaching nearer or to review the funds happens at this stage. Since it takes less time to review the situation again, the fee is normally half from the first year fee.
The most important question now is: How much does a financial advisor charge?
How much Financial Advisor Charge
On analyzing the List, I realised that the range of fees that is charged varies from one planner to another. On a broader note, the charges fall in between these ranges –
- Financial Advisor charges anything between Rs. 10,000 – Rs. 25,000 for the first year.
- Renewal fees charges are between Rs. 5,000 – Rs. 15,000
Based on the above charges, I have thought of taking an average of Rs. 15,000 for the first year and Rs. 8000 for the subsequent years as the baseline that a financial advisor may charge. Please note that I have also assumed an increment of Rs. 1,000 in renewal fee every year. ( even financial advisors have to fight inflation )
This is a broad-based fee structure just to analyze whether is it worth paying fees to financial advisor? There may be a slight variation in fees depending upon the financial advisor you choose.
Also Read : Should I surrender my Jeevan Anand Policy?
How much should you pay a financial advisor?
Before deciding on how much you should pay a financial advisor, let’s look at how much money will you pay of you decide to hire a financial advisor for a span of 20 years?
|Average Finacial Planner Fee Year Wise|
|Year||Amount( In Rs.)|
From the baseline calculation that we looked at in the above table, you can see that you will have to pay approximately 3.4 Lakhs to a financial advisor in a span of 20 years. The first question that crops up in our mind would be – Is it worth paying that much amount?
Are financial advisor fees worth it?
This is where most of us have doubts in our mind and start questioning our choices of going to an advisor for planning. Is the financial advisor worth paying that much amount because it is an upfront fee? Is it reasonable to pay someone Rs. 15,000 upfront in the first year and that too for an advice? Does it make sense to pay someone who will then advise me on my financial situation? Can’t I consult my family and friends for free to decide on investment plans that can safeguard my future? Let’s see how a financial advisor can help you to save money and how much?
Direct Plans Vs Regular Plans
Suppose you are investing Rs. 20,000 per month in equity mutual funds in regular plans and your financial advisor asks you to shift to direct plans of mutual funds. How much you will save in a span of 20 years
|Regular Plan||Direct Plan|
|Monthly SIP – Rs. 20,000||Monthly SIP – Rs. 20,000|
|Time Frame -20 Years||Time Frame -20 Years|
|Rate of Return – 11%||Rate of Return – 12%|
|Amount at the End of Tenure- 1.73 Crores||Amount at the End of Tenure -1.98 Crores|
Returns gained in most of the direct plans are 1% higher than regular plans at this point of time. It can be higher in future.
Simply put, it is a net gain of 25 Lakhs in 20 years if you shift to direct plans, Right!
Fees Paid to financial advisor – 3.4 Lakhs. Is it worth it? You decide!
If the difference in future comes out to be 1.5%, the amount at the end of tenure in direct plan would be 2.11 Crores.
Which means that it would be a Net Gain of 38 Lakhs. Is it worth it? You decide!
What if I can only invest Rs. 10,000 per month in SIP? What would be my net gains?
The net gains would still be 12 Lakhs and you are paying a fee of 3.4 Lakhs.
Life Insurance Policies Returns
Selling insurance policies is a tough task but people within the insurance industry know the tricks of the trade that works on general public at large. Products are designed in such a way that one day or other you will fall in the trap. It may be because of returns shown to you when markets are high or selling you endowment policies when markets are low. It is not because insurance guys are very smart, it is also because of the fact that we can be greedy sometimes or even scared.
Whatever may be the reason, let’s see how much can you gain
|Endowment Policy||Mutual Funds Direct Plan|
|Monthly Premium – Rs. 10,000||Monthly SIP – Rs. 10,000|
|Time Frame -20 Years||Time Frame -20 Years|
|Rate of Return – 6%||Rate of Return – 12%|
|Amount at the End of Tenure- 46 Lakhs||Amount at the End of Tenure -99 Lakhs|
The Net Gain that one would have otherwise earned would be – 53 Lakhs
Are you still not convinced? Let’s look at another example.
Term Insurance Policies
How many of you are happy with the term insurance cover of 1-1.5 Crore? Do you think, it is sufficient?
Will you believe me if I tell you that it is never going to be sufficient with monthly expenses of Rs. 50,000(inflation adjusted)?
Let’s break this down with an example:
Your age – 35 Years
Your wife`s age -32 Years
Life expectancy -85 Years
Current monthly expenses – Rs. 50,000
At this age and with the amount of expenses, your term insurance cover requirement would be a minimum of 2.5 Crores which excludes your goals for child education, child marriage and other loans.
Are you still happy with your term insurance coverage of 1 crore? Do you still feel that that it is wrong to pay a small amount of fee to a financial planner? Would not you like your family to be financially secure, especially when you are not around?
As an Indian Resident, I have 15 Lakhs in fixed deposits (FD) as part of my debt portfolio and I fall in the tax slab of 30%. With 7% interest rate of FD, I am earning an interest of 1.05 Lakhs per annum and I am happily paying close to Rs. 35,000 as tax. Why?
My financial advisor asked me to shift my investments from FD to debt mutual funds and this saved half of my tax. I was previously not aware that debt mutual funds can help me to save tax (not going in exact calculations)
I clearly saved my fee. Is it still worth paying fee? You decide!
However, this is completely opposite in case of NRIs. For them, FDs are better source of investment than any others since it is Tax Free in India and most of the countries.
Financial advisors push you to the extent that you start getting frustrated. Normally, what they push you for is to purchase a health insurance policy. No matter how much are you covered by your employer, they will still ask you to purchase a separate health insurance policy. Their only reason, helping you out during your retirement days. Your entire retirement corpus can go for a toss if you do not have a high cover health insurance policy.
If you do not buy one for yourself, you are going to pay much more in your life time than the fee paid to a financial advisor.
This is a big area of concern even for DIY investors. You may be investing in direct plans of mutual funds, having enough term and health coverage, but what about your asset allocation? Most of the investors run behind returns. In this process, they forget that they require corpus at some point of time and they have to forget returns at that point of time. What will you do if you are getting returns of 20% and still do not have required corpus for the desired goals? Or what if in the process of running behind the returns, you do not move from equity to debt at the desired time? Your whole idea of investing is of no use. Does this make any sense?
This is where you will require the help of a financial advisor.
There is a big list which I cannot cover in details here. Financial advisor can help you in
- Stopping you from buying a second house for investment purpose
- Suggesting you to purchase a personal accident policy
- Helping you decide your goals
- Stopping you buy return of premium term plan
- Consolidating your mutual funds portfolio
Is it worth hiring a financial advisor?
Now, you tell me, is it worth hiring a financial advisor? Yes or No?
Emotional Dilemma in Investing
The above-mentioned points were only about returns or security for you and your family. But do you think that you have the patience of staying invested for 20 years. Most of the investors do not have. Our general mentality is that when the markets go up, we want to invest more, and when the markets go down, we want to withdraw. In case of any financial emergency, we want to withdraw. In other cases like if I want to a home, I want to withdraw.
Financial advisors helps you to stay calm, stay invested. That is the most important trait which can help you to achieve your goals and help you to become wealthy. Yes, there are exceptions always. If you have everything mentioned in the article, you also should join the league of financial advisor.
I know, it is a long article but if you still want to read some FAQs, go ahead
How do financial advisors get paid?
There are 2 ways financial advisors get paid
Fee Only Financial Advisors – Flat fee from the client, no commissions – Hire Them
Fee Based Financial Advisors – Fee + Commission from the products they sell – Avoid Them.
What percentage should a financial advisor charge?
If you look at it from my point of view, a financial advisor should not charge you a percentage of your assets. For example, if your financial advisor is asking you to invest 1 Lakh per month in FD, do you think it is wise for him to charge some percentage on this FD as well? Is he helping you to get better returns on your FD? If not, then why charge the percentage cut off.
How much commission do financial advisors make?
Fee only financial advisor make nothing from commissions.
Fee based financial advisors – No idea, it depends on the products they sell. If they are selling you an endowment policy, the commission can be as high as 35%.
Is financial advisor fee negotiable?
Do you negotiate with your bank to increase/decrease your FD rates? Similarly, what difference will it make if you plan to negotiate Rs. 1000-Rs. 2,000.
Please, do not do that. I am talking about fee only financial planner only.
For fee based, I am not sure if they reduce your fee and get better commissions from the products they sell.
Is it a good idea to have a financial advisor?
Yes, it indeed is a very good idea. You should be in a better position to answer this question. ( I hope you have read the complete article)
What can a financial advisor do for me?
I have explained everything in detail. Do I need to tell more?
Do banks have financial advisors?
Of course, Yes. They are called relationship managers, who sell you the commission-based products. Use banks only for banking, not for products.
How do you pay a financial advisor?
By cheque, online transfer or its better you ask your financial advisor- Sir/Ma’am, how should I pay you?
How do I find a financial advisor for retirement?
Find a financial advisor for complete financial planning, retirement would anyways be included in it. Please note that it is difficult to plan only for retirement without understanding other goals.
How much money do you need to have a financial advisor?
Just the advisor fee, that is the amount you need to have a financial advisor. There are chances that you may only have monthly saving of only 10,000 but you want to start investing. It is just the beginning but you can still approach a financial advisor who can guide you towards achieving your financial goals.
Do you have to be rich to have a financial advisor?
Absolutely not. Financial planning is still at very nascent stage in India. The financial advisor fee is very low. You do not have to be rich to have a financial advisor. You just need to decide that you want to have one.
Do you still feel that financial advisor fees in India is high and it is not worth paying.
Do share your views and keep investing.