September 23, 2016

Why and How MF Advisors Can Charge Fees to Clients

Sadique Neelgund

Why and How MF Advisors Can Charge Fees to Clients

There is a lot of confusion around this matter amongst the financial advisory fraternity. I wanted to share some of my personal views on this topic based on simple logics, interactions with other advisors and precedencies observed.

After the SEBI Investment Advisor Regulations, 2013 came into effect, many of the Mutual Fund advisors came to a conclusion that only RIAs can charge fees and not MF Advisors. Please make note of the word advisor used not the word distributor. MF Advisors are the ones who are adding value beyond pure transaction facilitation. This article is more relevant for the MF advisors who are creating real value to their clients by exhibiting professionalism.

MF Advisors Can Charge Fees

Two very important points can be referred to say that MF Advisors can charge fees. First, when SEBI banned entry load in 2009, it allowed the MF Advisors to charge fees in lieu of entry load. After all, a lot of time and efforts goes into educating/ acquiring clients and value added is much beyond transaction facilitation.

Second, SEBI has included MF Distributors under the list of people who are exempted from registering as an Investment Advisors.  The exact wordings under Exemption from registration read;
“Any distributor of mutual funds, who is a member of a self-regulatory organization recognized by the Board or is registered with an association of asset management companies of mutual funds, providing any investment advice to its clients incidental to its primary activity”.

Hence, MF Advisors can charge fees but with certain restrictions and by creating real value. And this can be done within the overall regulatory framework.

Why Charging Fees is Important for MF Advisors

After the entry load ban, upfront commission ban and now talks are on about reducing overall TER, MF Advisorsincome has been hit drastically and a majority of them are finding it increasingly difficult to survive and grow. Here are some reasons why MF Advisors should charge fees to increase their income and overcome this challenge.

(1) It is economically not feasible to onboard and service the small retail investors say with an ability invest Rs. 10,000 or less a month. Hence now most of the MF Advisors are focusing only on bigger ticket size clients and ignoring the small investors. Back of the envelope calculation will show that; a good quality advisor with a boutique firm set-up should be earning no less than Rs. 10,000 per client/family per annum.

(2) There is a high entry barrier for aspiring MF Advisors, as there is hardly any income from commissions in the first 3-5 years of setting up. There is hardly any incentive for the majority of career seekers to take this as a profession of choice, because of poor income stream only with commission based model.

(3) Now with Direct Plans & Online Investing gaining popularity day by day if your existing clients or prospects want to just get your advice but would like to invest directly online. It’s better to have an alternative fee-based model than to say ‘NO’ and shoo them away.

(4) With commission disclosure coming soon from October (next month), those MF Advisors having clients with lower ticket size should be easily able to communicate the gap between how much they are earning and how much value they are adding. And charge fee.

(5) Charging fees also help ensure your clients and prospects perceive you as an “advisor/professional/consultant” and not as an “agent/distributor/broker”

There are many more reasons why MF Advisors should charge fees based on advisor specific situation and client-specific situations. These were just the top 5.

Anyone doing Rs. 5000 SIP has the ability to pay Rs. 5000 Fees. But why should they pay?

A person doing a Rs. 5000 SIP would typically have a minimum income of around Rs. 50,000 p.m. i.e. Rs. 6 lakhs p.a. And I think a person earning that much would easily have the ability to pay Rs. 5000 as professional fees. Now it’s the duty of MF Advisor to convert that “ability” into “willingness” by creating a strong value proposition and learning the art of communicating that value.

There are certain things investors will value and be willing to pay for it. Some of them are;

  • Create a Written Goal based Investment Plan – covering all goals of family
  • Help them create/track their Networth Statement and Income Expenditure Statement
  • Proper Risk Profiling to understand investor beyond the time horizon of investments
  • Properly written process showing how your shortlist and recommend MF Schemes
  • Quarterly, Half Yearly or Annual Review Meetings to track progress
  • Your qualifications, testimonials, personal branding, and other credibility builders
  • Good communication & relationship skills – nobody explicitly asks, but is expected by all

Do’s and Don’ts while charging Fees

I think MF Advisors should respect the SEBI Investment Advisors regulations and follow the law of land. And appreciate the fact that RIAs are making an extra effort to build new practice models and taking the pain to comply with the regulations. There are certain things to take care of while charging fee being only a MF Advisor. Here they are, based on my interpretation of regulations;

  • Avoid calling your services as “Investment Advisory” or “Financial Planning”. Both terms/services come under the gambit of RIA regulations. Call your services as Personal Financial Advisory, Goal-based Investment Recommendations, MF Suitability Analysis Report, Wealth Management etc.
  • Avoid doing Comprehensive Financial Plans – Data Collection, Analysis, and Recommendation of multi-asset/product classes in one report. This falls under RIA. MF Advisors should stick to Data Collection and Analysis of what is required to give Mutual Fund Investment recommendations.
  • Create and Maintain documentation of risk profiling, reports generated, recommendation of MF advice, MF Selection process, communication with clients etc. This also helps you in justifying your value add and fees.

Sample of a Report which MF Advisors can Generate for charging Fees

I think SEBI should encourage MF advisors to charge fees and increase income to ensure good talent is attracted to industry and existing ones survive & grow. Existing MF advisors also should take interest in acquiring small investors instead of chasing Mass Affluent and HNIs. And AMFI should come out with a circular / notification giving clarity on this matter so that MF advisors can follow this approach more confidently. This is absolutely in client interest and nobody is a loser in this approach.

On the mid to long term basis say in about 3-5 years, MF advisors should figure out a way become RIAs wherein they can do comprehensive financial planning and get higher wallet share of clients. One has to aim to evolve beyond being just a MF Advisor.


11 Thoughts to “Why and How MF Advisors Can Charge Fees to Clients”


    very informative

  2. David Chintamani says:

    If the advise given here is followed, the mutual fund distributor will lose his licence! This advise is in clear contradiction to what the babus at SEBI are trying to do! A mutual Fund distributor can give advise ONLY while distributing! He cant advise anyone regarding how to invest in mutual funds on their own and then charge only fees for it. And I am sorry, you CANT CALL YOURSELF personal financial advisory OR Wealth Manager either! If you are, and you believe this Mr Neelgund, you are hitting your own feet with an axe. As on date SEBI babus not concentrating on taking action against big defaulters of this rule! But one day, they will catch a few BIG ONES and make an example of them. Better – Just get enrolled as RIA & inform your prospect about any conflict of interest from your tie-up with a distribution company! And DO GET THIS DISCLOSURE SIGNED BY THE PROSPECT. The babus are copying mature markets in Europe and North America, they will destroy the MF industry. Its just a matter of 1 big market crash. BUT – What can one do? Its a DEAF Finance ministry, a deaf FM, so MF distributors will have to abide by the clear guidelines by SEBI babus. Till one day, when the are relaxed – and that day will come in a few years.

  3. This is P.V.NAGESWARARAO,doing as a LIC Agent & Mutual funds, since 1988. Ur article is very sensitive issue of Ifa’s community, Thank u very much, all my co-leagues are coming one roof, i.e., geathered and formed Associations, when SEBI announced disclosing our commission/brokerage on investors statement. It’s very good to ifa’s community. In the fast days, no body support Welfare Associations and not interest to geather in one roof,( they dont care UNITY is STRENGTH & KNOWLEDGE is POWER *)

    As my seniority, when SEBI banned entry load , From onwards my self collecting fee as advisory charges from my Investors, from beggining my career, mostly giving advises, canvassed & procuring small & middle class investment families . my investors happily enjoying and getting maximum returns from their investments. Rich people not responding ( high volume investors) comparetively middle & small investors.


    P VNageswara Rao,
    IFA,Vijayawada-520 001. (A.P)

  4. Smart says:

    Great and absolutely practical! Keep it up!!!


    Nice & vey informative article.

  6. Raghu says:

    Thanks sir , for putting forth an article , stating that a mf advisor can charge fees , and still is not under the preview of RIA. Quit few IFAs were voicing thus earlier in various forums, how ever a comprehensive article of this nature, I am seeing for the first time. I appreciate your article , as so far the media kept on trying to confuse the IFAs on this.

  7. What’s up colleagues, its wonderful post concerning educationand
    fully defined, keep it up all the time.

  8. I like what you guys tend to be up too. Such clever work and reporting!
    Keep up the amazing works guys I’ve incorporated
    you guys to my personal blogroll.

  9. Hello there! Would you mind if I share your blog with my myspace
    group? There’s a lot of people that I think would really
    appreciate your content. Please let me know. Many thanks

Leave a Reply

Your email address will not be published. Required fields are marked *