Confused Wealth Manager Fees? I have 20 cr, 10 cr liquid: Which Model Suits Me?

Ans: When considering wealth managers, it's important to distinguish between two key models: Fee-Based and Commission-Based. Each model has its own structure, and understanding them can help you choose the right professional for your financial goals. Let’s break down these two models and why commission-based advisors might be a more viable choice in India today.

Fee-Based Model: Less Evolved in India
The fee-based model charges a flat or percentage fee directly to the investor for managing their portfolio. The fee is fixed, regardless of the portfolio’s performance. While this model is popular in some parts of the world, it’s still quite nascent in India.

Limited Availability: There are currently fewer than 1,000 Registered Investment Advisors (RIAs) in India. These professionals operate under a strict fee-only structure. However, the limited number of RIAs makes finding a reliable, experienced fee-based advisor more challenging.

No Commission: Fee-based advisors don’t receive any commissions from the products they recommend. While this can ensure more unbiased advice, the model lacks flexibility for the Indian market, especially where investors prefer ongoing engagement with their wealth managers.

Potentially High Costs: For a corpus of Rs 20 crore, you may end up paying significant fees without necessarily getting better service. Since these fees are not tied to the performance of your portfolio, it might feel like you’re paying more, especially during a market downturn.

Given that fee-based wealth management has not yet evolved in India, it may not always offer the best value proposition, especially for large portfolios like yours.

Commission-Based Model: Well-Established in India
In contrast, the commission-based model is more common and better regulated in India. Most advisors and brokers in India operate under this structure. In this model, the advisor or broker earns a commission based on the financial products you invest in.

Abundant Advisors: Commission-based advisors are far more accessible in India, making it easier to find a skilled professional who understands your needs. You won’t face the shortage of professionals that exists in the fee-based category.

SEBI’s Regulations: The Securities and Exchange Board of India (SEBI) has created smart regulations to govern commission-based advisors, ensuring transparency and aligning their incentives with your portfolio’s performance. Their commissions are now linked directly to the value of your portfolio.

Aligned Incentives: SEBI has ensured that if your portfolio grows, the broker earns more commission. Conversely, if your portfolio value decreases, the broker’s commission also reduces. This creates a win-win situation where the broker is motivated to improve your portfolio’s performance.

Affordable for Large Portfolios: Given your substantial corpus of Rs 20 crore, a commission-based model could be more cost-efficient. The advisor is incentivised to grow your portfolio, ensuring that both you and the advisor benefit.

Why Commission-Based is Better for You
Considering that the fee-based model is still in its infancy in India, a professional commission-based advisor might be the most efficient choice for your financial needs. Not only is this model more evolved and widespread in India, but SEBI’s regulations also mitigate conflicts of interest. By linking the advisor’s commission to your portfolio’s performance, the advisor will be motivated to ensure your wealth grows, creating a win-win relationship.

Instead of paying a flat or hourly fee that doesn’t change regardless of performance, a commission-based model ensures that both you and your advisor have skin in the game. This way, you benefit from a more proactive and engaged wealth manager.

Final Insights
In conclusion, while fee-based wealth managers offer certain benefits, the structure is not yet mature in India. The commission-based model, on the other hand, is more widely available and better regulated by SEBI. With your Rs 20 crore corpus, you would likely benefit more from a professional commission-based advisor who is aligned with your financial success.

Choosing a well-regulated, commission-based advisor ensures that your portfolio grows in tandem with the advisor’s success, creating a relationship that benefits both parties.

Best Regards,

K. Ramalingam, MBA, CFP,
Chief Financial Planner,
www.holisticinvestment.in
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