 "Financial planners' fees should match your needs")
In recent years, many retail (small) investors have started seeking advice actively from financial planners. With the regulatory changes regarding expenses of various products such as insurance and mutual funds, and introduction of many new products, they have to be constantly on their feet or be very well informed to take advantage of a situation.
Another important development in the past decade is the growing importance of equities in one's portfolio, due to rising inflation.
Financial planners, on their part, have to keep reinventing themselves on a regular basis, to ensure being able to charge a fee. Many have been coming with innovative models, too.
Financial planners charge clients based on the latter's comfort with the fee structure. This has led to different fee models. Everyone justifies their charges by showing the value they offer to an individual.
Advisory only
When you enrol for the services of a financial planner, the first thing all of them do is prepare a financial plan, for which they charge a flat fee. The charges for a financial plan differ from one planner to another. Some charge as little as Rs 6,000 and some go as high as Rs 40,000 annually. It can be higher for someone wealthy, as making a plan for such individuals is more complex. Next comes the implementation. This is where the fee structure differs.
Many financial planners offer only a fee-based advisory. They make a plan and hand it over to you, with recommended products. The client then needs to invest and buy each product on his or her own. Sudipto Roy, managing director, Principal Retirement Advisors, says his company charges between Rs 6,000 and Rs 20,000 for a financial plan. Thereafter, there's an annual review. "Clients can also choose to review the plan at their discretion, on the occurrence of some major life-changing event," says Roy. The review charges range from Rs 3,000 to Rs 7,500.
Some entities such as The AZAD Program offer only advisory services. Rajiv Jamkhedkar, its founder and head, says they charge Rs 2,600 a month or Rs 31,200 a year. This covers all aspects - preparing the financial plan, quarterly and annual reviews, and personal consultations. No product is sold either by them or by a partner entity of theirs. "We handhold customers through every financial aspect, from helping them claim provident fund money from previous employers to even helping them buy direct mutual fund plans online," says Jamkhedkar.
Benefit: The most transparent way to manage your finances. Also, a person doesn't need any minimum assets to enrol.
Drawback: The dropout rate is higher, as customers need to do a lot of things on their own.
Suited for: Individuals who prefer a do-it-yourself approach and need only some handholding. It's easier for younger individuals to enrol, as there's a low fee barrier and one can start investing early in the career.
Commission-based
After making a financial plan, some companies and planners don't charge the customer any fee for managing the assets. However, they require clients to invest through them and thereby earn commissions. Many financial planners follow this structure. They charge for the plan and review, and earn a commission from the products the client invests or buys.
Achin Goel, head of wealth management and financial planning at Bonanza Portfolio, says the company charges Rs 30,000 (excluding taxes) for a financial plan. Thereafter, a client doesn't need to pay anything except when a reworking is required on the plan because of a major life event that changes the financial position. For reworking, Bonanza charges Rs 10,000 (excluding taxes). There's a review every six months to see if the investment is performing as planned but no separate charge for this.
Benefit: No upfront or recurring costs. Also, a person in most cases doesn't need any minimum assets to enrol.
Drawback: In some cases, the advisory can get product driven.
Suited for: Those who don't want to cut cheques regularly for advisory and are fine with planners receiving commission on their investments or purchases.
Fee depends on your assets
When planners engage with clients at multiple levels, the former usually opts for a fee-based model. These clients already have substantial savings and investments. Suresh Sadagopan, who works on this fee structure, says once clients tell them to implement the financial plan, there are quarterly meetings to check if this is being followed. If not, changes and recommendations are made. There's a 'round-up' document is prepared, like minutes of a meeting and is shared with the client. They also do a full portfolio review every six months. The suggestions are personalised. For example, if husband and wife have a conflict over financial matters, he consults and helps to resolve it.
Typically, Sadagopan prefers clients who have a portfolio of Rs 30 lakh and above and charges around 0.7 per cent of the assets under management as annual fee. This ensures his costs are covered. He charges around Rs 40,000 for a financial plan. This can vary, depending on the amount of work required. If there's any commission earned on a product, it's disclosed to the client upfront.
Many financial planners also offer clients the option of paying a fee based either on assets or a flat amount, irrespective of the investments while offering similar services.
Benefit: Personalised service and higher engagement by an advisor.
Drawback: Client needs to have substantial savings before enrolling.
Suited for: Those looking for regular handholding and have significant assets.
Performance-Linked
Some financial planners, with wealthy clients, might invest part of the portfolio in risky assets to generate slightly higher returns, termed alpha. Mostly, the investments are made in stocks and the investment advisor might either recommend stocks or manage this part of the portfolio for clients. These individuals usually have more disposable income than what's needed for their financial goals.
When the returns from these investments cross a particular threshold, the advisor splits the profit. Say, an advisor and a client decide 10 per cent as the threshold. If the returns are up to 10 per cent, the advisor will not charge any fee. Any return above 10 per cent in a year and the advisor takes six to eight per cent of the profit.
Benefit: Can help generate higher returns on investment.
Drawback: Higher risk or direct exposure to equity also means part of the portfolio is subjected to higher volatility.
Suited for: Wealthy individuals, who understand the risk involved.
There is no standard or right fee model. Your choice should depend on your requirements and what works best for you. What an individual needs to ensure is that he gets a planner who works for his benefit and does not look for ways to earn money by misusing his assets. One way to judge a financial planner is to ask him whether you can invest on your own, rather than through him. If he says yes without hesitation, or does not try to convince you otherwise, that is a good start.
Anirudha Taparia
Managing partner, IIFL Wealth Management
The needs of high net worth individuals (HNWIs) are complex and comprise far more than the traditional asset allocation. That's where firms such as ours play a vital role. We cover the entire gamut of services, from basic ones such as mutual fund (MF) investments and insurance to more intricate products like private equity and real estate portfolio management. The majority of clients are entrepreneurs. If they request, we even help them to raise capital for business or list their company on stock exchanges.
HNIs have ample resources to achieve their financial goals such as retirement, children's education and marriage. Most, therefore, come to wealth management firms to enhance their business and personal assets and ensure that these are protected and preserved for the future.
Instead of a financial plan, wealth managers sit with clients to discuss their objectives and construct a customised investment mandate. Typically, clients start with smaller values. On an average, they seek advice from two wealth management firms.
The average assets a client has is around Rs 15-20 crore. The fee could range between a flat fee for advisory services to a maximum fee of around 40 - 50 basis points of the assets under management.
Another important development in the past decade is the growing importance of equities in one's portfolio, due to rising inflation.
Financial planners, on their part, have to keep reinventing themselves on a regular basis, to ensure being able to charge a fee. Many have been coming with innovative models, too.
Also Read
At a recent event, Suresh Sadagopan was making a presentation to fellow certified financial planners (CFPs). He told them they needed to move all their clients to direct mutual fund plans, to withstand competition from start-ups who are disrupting the financial space. The suggestion did not go down very well with the audience of around 20. Many said this would result in significant loss of commission, the bread and butter of many financial planners. Some said that while direct plans may benefit clients, most of the latter prefer a commission-based model, as they don't have to shell out anything upfront. Clients, they said, are fine if the planner earns Rs 2 lakh on a corpus of Rs 3 crore through commissions but convincing them to pay Rs 1.5 lakh upfront is a difficult proposition.
Financial planners charge clients based on the latter's comfort with the fee structure. This has led to different fee models. Everyone justifies their charges by showing the value they offer to an individual.
Advisory only
When you enrol for the services of a financial planner, the first thing all of them do is prepare a financial plan, for which they charge a flat fee. The charges for a financial plan differ from one planner to another. Some charge as little as Rs 6,000 and some go as high as Rs 40,000 annually. It can be higher for someone wealthy, as making a plan for such individuals is more complex. Next comes the implementation. This is where the fee structure differs.
Many financial planners offer only a fee-based advisory. They make a plan and hand it over to you, with recommended products. The client then needs to invest and buy each product on his or her own. Sudipto Roy, managing director, Principal Retirement Advisors, says his company charges between Rs 6,000 and Rs 20,000 for a financial plan. Thereafter, there's an annual review. "Clients can also choose to review the plan at their discretion, on the occurrence of some major life-changing event," says Roy. The review charges range from Rs 3,000 to Rs 7,500.
Some entities such as The AZAD Program offer only advisory services. Rajiv Jamkhedkar, its founder and head, says they charge Rs 2,600 a month or Rs 31,200 a year. This covers all aspects - preparing the financial plan, quarterly and annual reviews, and personal consultations. No product is sold either by them or by a partner entity of theirs. "We handhold customers through every financial aspect, from helping them claim provident fund money from previous employers to even helping them buy direct mutual fund plans online," says Jamkhedkar.
Benefit: The most transparent way to manage your finances. Also, a person doesn't need any minimum assets to enrol.
Drawback: The dropout rate is higher, as customers need to do a lot of things on their own.
Suited for: Individuals who prefer a do-it-yourself approach and need only some handholding. It's easier for younger individuals to enrol, as there's a low fee barrier and one can start investing early in the career.
Commission-based
After making a financial plan, some companies and planners don't charge the customer any fee for managing the assets. However, they require clients to invest through them and thereby earn commissions. Many financial planners follow this structure. They charge for the plan and review, and earn a commission from the products the client invests or buys.
Achin Goel, head of wealth management and financial planning at Bonanza Portfolio, says the company charges Rs 30,000 (excluding taxes) for a financial plan. Thereafter, a client doesn't need to pay anything except when a reworking is required on the plan because of a major life event that changes the financial position. For reworking, Bonanza charges Rs 10,000 (excluding taxes). There's a review every six months to see if the investment is performing as planned but no separate charge for this.
Benefit: No upfront or recurring costs. Also, a person in most cases doesn't need any minimum assets to enrol.
Drawback: In some cases, the advisory can get product driven.
Suited for: Those who don't want to cut cheques regularly for advisory and are fine with planners receiving commission on their investments or purchases.
Fee depends on your assets
When planners engage with clients at multiple levels, the former usually opts for a fee-based model. These clients already have substantial savings and investments. Suresh Sadagopan, who works on this fee structure, says once clients tell them to implement the financial plan, there are quarterly meetings to check if this is being followed. If not, changes and recommendations are made. There's a 'round-up' document is prepared, like minutes of a meeting and is shared with the client. They also do a full portfolio review every six months. The suggestions are personalised. For example, if husband and wife have a conflict over financial matters, he consults and helps to resolve it.
Typically, Sadagopan prefers clients who have a portfolio of Rs 30 lakh and above and charges around 0.7 per cent of the assets under management as annual fee. This ensures his costs are covered. He charges around Rs 40,000 for a financial plan. This can vary, depending on the amount of work required. If there's any commission earned on a product, it's disclosed to the client upfront.
Many financial planners also offer clients the option of paying a fee based either on assets or a flat amount, irrespective of the investments while offering similar services.
Benefit: Personalised service and higher engagement by an advisor.
Drawback: Client needs to have substantial savings before enrolling.
Suited for: Those looking for regular handholding and have significant assets.
Performance-Linked
Some financial planners, with wealthy clients, might invest part of the portfolio in risky assets to generate slightly higher returns, termed alpha. Mostly, the investments are made in stocks and the investment advisor might either recommend stocks or manage this part of the portfolio for clients. These individuals usually have more disposable income than what's needed for their financial goals.
When the returns from these investments cross a particular threshold, the advisor splits the profit. Say, an advisor and a client decide 10 per cent as the threshold. If the returns are up to 10 per cent, the advisor will not charge any fee. Any return above 10 per cent in a year and the advisor takes six to eight per cent of the profit.
Benefit: Can help generate higher returns on investment.
Drawback: Higher risk or direct exposure to equity also means part of the portfolio is subjected to higher volatility.
Suited for: Wealthy individuals, who understand the risk involved.
There is no standard or right fee model. Your choice should depend on your requirements and what works best for you. What an individual needs to ensure is that he gets a planner who works for his benefit and does not look for ways to earn money by misusing his assets. One way to judge a financial planner is to ask him whether you can invest on your own, rather than through him. If he says yes without hesitation, or does not try to convince you otherwise, that is a good start.
Anirudha Taparia
Managing partner, IIFL Wealth Management
The needs of high net worth individuals (HNWIs) are complex and comprise far more than the traditional asset allocation. That's where firms such as ours play a vital role. We cover the entire gamut of services, from basic ones such as mutual fund (MF) investments and insurance to more intricate products like private equity and real estate portfolio management. The majority of clients are entrepreneurs. If they request, we even help them to raise capital for business or list their company on stock exchanges.
HNIs have ample resources to achieve their financial goals such as retirement, children's education and marriage. Most, therefore, come to wealth management firms to enhance their business and personal assets and ensure that these are protected and preserved for the future.
Instead of a financial plan, wealth managers sit with clients to discuss their objectives and construct a customised investment mandate. Typically, clients start with smaller values. On an average, they seek advice from two wealth management firms.
The average assets a client has is around Rs 15-20 crore. The fee could range between a flat fee for advisory services to a maximum fee of around 40 - 50 basis points of the assets under management.