1. Mutual fund distributors
Distributors can give only incidental advice, which is restricted to selecting funds for investment. They do not charge a fee but earn commission from the higher expense ratio of regular schemes. Useful for small investors who can’t afford fee only advisers.
2. Insurance agents
Insurance agents help select insurance policies. While individual agents are tied to one company, corporate agents can sell products from multiple insurers. They also change nothing and earn only from the commission. Commission drives their advice.
3. Bank relationship managers
Most banks have relationship managers pushing mutual funds and insurance products. The advice is free of cost, but the bank earns commission on investments. Banks are the biggest culprits when it comes to fl awed investment advice.
4. Stock brokers
In addition to providing a trading platform, brokers also recommend stocks to buy or sell. This advice is also free but the broker earns brokerage every time you buy and sell. Many stock brokers have also started mutual fund and insurance distribution verticals.
5. Wealth managers
There was a time when only those managing very large portfolios (over Rs 1 crore) were known as wealth managers. Now, even a portfolio of Rs 25 lakh will have a wealth manager. There is usually a fixed fee (25-50 bps of AUM per annum) or variable fee (10-20% of the additional returns earned above a pre-determined benchmark). Some wealth managers also earn commission on products they sell.
6. Robo advisers
This new breed of advisers act as wealth managers for small investors. The advice (on asset allocation, fund selection, insurance plan) is doled out by computer algorithms and therefore lacks a personal touch. The charges are between Rs 1,000 per annum (for pure robo advisory) to Rs 12,000 per annum (for customised personal advice).
7. Fee-only advisers
As the name suggests, these advisers don’t earn any commission from the products they recommend but earn a flat fee from the client. Since these registered investment advisers (RIAs) don’t earn commissions, there is no conflict of interest. However, make sure your RIA doesn’t run an insurance agency or mutual fund distribution in the name of relatives.