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Should I choose a commission-based advisor or a fee-only RIA?

Ramalingam

Ramalingam Kalirajan  |7330 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Oct 21, 2024

Ramalingam Kalirajan has over 23 years of experience in mutual funds and financial planning.
He has an MBA in finance from the University of Madras and is a certified financial planner.
He is the director and chief financial planner at Holistic Investment, a Chennai-based firm that offers financial planning and wealth management advice.... more
Asked by Anonymous - Oct 05, 2024Hindi
Money

Where should I go ?? Understanding the Incentives: Commission-Based Advisors: How they make money: They earn a percentage of the investment products they sell to you (mutual funds, insurance, etc.). Their revenue comes from the commissions paid by the companies whose products they sell. Incentive Structure: Since they get paid based on the products you buy, there’s a natural incentive for them to push products that give higher commissions, even if those products don’t always offer the best long-term growth for you. For example, they may suggest mutual funds with high expense ratios or ULIPs (which have higher fees) over low-cost direct equity mutual funds because they earn more on those products. Conflict of Interest: While they may seem to be working for your financial growth, their focus is often influenced by the product manufacturers (fund houses, insurance companies) rather than by your specific goals. Their goal can become selling more or higher-fee products rather than optimizing your portfolio's performance. Fee-Only RIA (Certified Financial Planners): How they make money: They charge you a fee, either a flat fee or a percentage of the assets under management (AUM), directly from you. They don’t earn commissions from fund houses or insurance companies. Incentive Structure: Because they’re not paid based on the products you buy, their primary focus is on providing unbiased advice that is solely in your best interest. They are motivated to keep you satisfied with the overall performance of your portfolio, your financial growth, and your long-term financial health so that you continue using their services. Fiduciary Duty: Fee-only RIAs are often legally bound by a fiduciary duty, meaning they are required by law to act in your best financial interest at all times. This is one of the biggest advantages, as their job is to ensure your financial goals are met with appropriate risk management, efficient tax planning, and optimized returns. Why Fee-Only RIAs Can Still Care About Your Growth: Your Growth = Their Reputation: Even though they charge fees directly from you, their reputation and continued engagement rely on how well they manage your portfolio and ensure it aligns with your goals. If your portfolio doesn’t grow and they don’t meet your expectations, you are less likely to continue working with them. Good RIAs build their business on client referrals and long-term trust, and they rely on providing excellent service and delivering results. Their reputation is their skin in the game. More Transparency: Fee-only advisors provide transparent pricing. You know upfront what you’re paying, and you won’t be hit with hidden fees or commissions that you might not notice in commission-based setups. Since they aren’t selling specific products, they focus more on low-cost index funds, ETFs, and direct mutual funds, which have lower fees and can potentially result in better long-term returns. Custom Portfolio Tailored to Your Needs: Since fee-only advisors aren’t restricted to selling certain products, they can craft a more diverse and well-balanced portfolio. They can focus more on your risk profile, your long-term goals, and tax efficiency, without the pressure of pushing high-commission products. Why Commission-Based Advisors Might Not Always Maximize Your Returns: Potential Conflict of Interest: Commission-based advisors often have a built-in conflict of interest. The products that provide them with higher commissions may not always be the best for you in terms of long-term returns. For instance, they may push you toward endowment plans, ULIPs, or actively managed funds that have high fees but don’t always generate the best long-term returns compared to low-cost index funds or direct equity mutual funds. High Expense Ratio Impact on Returns: The mutual funds or insurance products they sell typically have higher expense ratios or ongoing fees. Over the long term (10+ years), these fees can eat into your returns. For example, if a mutual fund charges a 2% annual fee versus a direct plan charging 0.5%, this difference can significantly reduce your returns over time. They may be incentivized to churn your portfolio (buy/sell frequently) to earn commissions, which can also reduce your overall returns due to transaction costs.

Ans: Understanding the incentives is key.

In a ULIP, the commission is fixed on your investment, regardless of how it performs. So, whether your money grows or not, the advisor earns the same.

Similarly, a fee-only RIA is charging a flat fee or a percentage of amount invested. Their fee doesn’t change, even if your portfolio underperforms.

However, a Mutual Fund Distributor (MFD) earns a commission based on your portfolio value. If your portfolio grows, they get a higher commission. If it underperforms, their earnings drop.

This creates a direct incentive for MFDs to help your portfolio grow.

Now, you decide where to go.

Best Regards,

K. Ramalingam, MBA, CFP,
Chief Financial Planner,
www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment
DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Users are advised to pursue the information provided by the rediffGURU only as a source of information to be as a point of reference and to rely on their own judgement when making a decision.
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Ramalingam

Ramalingam Kalirajan  |7330 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Jul 23, 2024

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What is the Fees of a Certified Financial Planner?
Ans: The fees for a Certified Financial Planner (CFP) vary widely.

Fee Structures
CFPs charge in different ways:

Hourly Rate: Rs 2000 to Rs 10,000 per hour.

Flat Fee: Rs 15,000 to Rs 75,000 for a comprehensive plan.

Percentage of Assets: 0.5% to 2% annually.

Retainer Fee: Rs 10,000 to Rs 50,000 per year.

Commission-Based CFPs
In India, many CFPs work on a commission basis.

Product Commissions: They earn from selling financial products like mutual funds and insurance.

No Direct Fees: You don’t pay them directly; they earn from your investments.

Professional Guidance: Choose a professional CFP who works on commission. It can be beneficial as they are motivated to help you grow your investments.

Services Provided
Comprehensive Planning: Includes retirement, tax, and estate planning, costing more.

Specific Advice: Focused on a single issue, typically costing less.

Experience and Reputation
Highly Experienced CFPs: Charge higher fees due to reputation.

Less Experienced CFPs: Charge lower fees to attract clients.

Location
Urban Areas: Higher fees due to living costs.

Smaller Cities/Towns: Lower fees.

Value of Professional Guidance
Personalized Advice: Tailored to help you achieve financial goals.

Long-term Benefits: Leads to better financial decisions.

Final Insights
Fee Structures Vary: Know the different ways CFPs charge.

Consider Services and Experience: Evaluate what you need and the CFP’s experience.

Weigh Costs vs. Benefits: Consider the long-term benefits of professional advice.

Commission-Based CFPs: They can be a good choice, offering motivated, growth-focused guidance.

Best Regards,

K. Ramalingam, MBA, CFP

Chief Financial Planner

www.holisticinvestment.in

..Read more

Ramalingam

Ramalingam Kalirajan  |7330 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Oct 07, 2024

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Dear Sir, Thank you for sharing your insights. While I appreciate the value MFDs can provide, I lean towards the fee-only advisor model for a few key reasons: Cost Efficiency: The lower expense ratios of direct funds can have a significant impact on long-term returns. Even a small difference in fees compounds over time, creating a substantial difference in wealth accumulation. Unbiased Advice: Fee-only advisors offer recommendations without the influence of commissions, ensuring that advice is entirely focused on the client’s best interests. Comprehensive Financial Planning: Fee-only advisors provide holistic guidance, including tax, retirement, and estate planning, ensuring my entire financial situation is optimized—not just investments. Active vs. Passive: Given the long-term performance of index funds and the cost advantages, I prefer a more predictable, cost-effective strategy, supported by unbiased advice. I believe this approach aligns better with my long-term goals of wealth creation. I appreciate your perspective and look forward to continuing the conversation. Thanks/Regrds,
Ans: Thank you for sharing your viewpoint. I understand your preference for fee-only advisors and the focus on cost efficiency. Direct funds do offer lower expense ratios, which, as you rightly noted, compound significantly over time. Fee-only advisors can indeed provide unbiased advice across various financial aspects. While I believe professional support from MFDs, who are compensated through performance-linked commissions, can help reduce emotional mistakes and optimize strategies, your long-term goals and cost-conscious approach make the fee-only advisor model a logical choice for you. It’s important to align your investment strategy with your personal preferences and goals.

Best regards,
K. Ramalingam, MBA, CFP
Chief Financial Planner
www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment

..Read more

Latest Questions
Milind

Milind Vadjikar  |795 Answers  |Ask -

Insurance, Stocks, MF, PF Expert - Answered on Dec 24, 2024

Asked by Anonymous - Dec 24, 2024Hindi
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Hello i am almost 30 now I have invested around 40 lakhs in Market (mutual funds plus equity) 6 lakhs ppf maybe 2 lakhs pf I have parental property of combining around 2.5cr I have my parents helath insurance from a private insurance company, also covered by cghs health scheme,so no major worries about health expenses, for me i have 10lakhs health insurance Apart from this we have family pension also. As of now overall i have a monthly income of around 2-2.25 lakhs. I have a car a bike a scooty all valid for next 8-10 years What should be my goal amount for the retirement, i want it as early as possible As per the current scenario i am assuming i will live max till 75 years age. As of now i can invest 80-90k per month Yet to be married i assume i need atleast Lakhs per month as of now What should be the ideal amount with which i can retire
Ans: Hello;

Hope you have adequate term life insurance for yourself.

You may start a monthly sip of 90 K in a combination of pure equity mutual funds.

After 10 years your sip and lumpsum investment will grow into sums of 2.09 and 1.24 Cr respectively.

This adds upto 3.33 Cr. If you add your ppf and EPF corpus then this should add upto a sum of around 4 Cr.

If you invest this corpus in a conservative hybrid debt fund and do a SWP at the rate of 3.5%, you may expect a post tax monthly income of
1 L+.

As you get married your expenses will rise as also the need to plan for various other goals.

Therefore the decision to retire from regular 9-6 job should be backed up with alternate business plan or such other plan to monetize your hobbies that may yield income over atleast next 10-15 years.

Best wishes;

...Read more

Radheshyam

Radheshyam Zanwar  |1112 Answers  |Ask -

MHT-CET, IIT-JEE, NEET-UG Expert - Answered on Dec 24, 2024

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Hello! Read your article of studying MBBS abroad. One question - after completing MBBS abroad, how can a student enter the Indian Market to do practising, is there any exam to appear, if so, the passing marks and in which hospitals the student can practice (Government or Private). Second Question: For studying Post - Graduation, will the abroad degree of MBBS will work for the entrance test for PG or any other option to take admission for PG? Thanking you Regards, Madhuri Shinde
Ans: Hello Madhuri.
First of all, thank you for reading the article so quickly and showing your faith in rediffGuru.
Here is the point-wise reply to your queries:
(1) To practice in India, the candidate has to appear for the Foreign Medical Graduate Examination (FMGE) conducted by the National Medical Commission (NMC) or National Board of Examinations (NBE)
(2) Passing Marks: A minimum of 50%
(3) The candidate can practice either in Govt or Private hospital
(4) One has to decide from which country he wants to do PG. As far as India is concerned, the candidate has to appear for the NEET PG entrance test. There are no direct PG admissions in India without NEET-PG if the candidate seeks an NMC-recognized PG qualification.
Finally, If you plan to pursue a PG degree abroad, ensure that the institution and course are recognized by the NMC to practice in India upon your return.

If satisfied, please like and follow me.
If dissatisfied with the reply, please ask again without hesitation.
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DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Investment in securities market are subject to market risks. Read all the related document carefully before investing. The securities quoted are for illustration only and are not recommendatory. Users are advised to pursue the information provided by the rediffGURU only as a source of information and as a point of reference and to rely on their own judgement when making a decision. RediffGURUS is an intermediary as per India's Information Technology Act.

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