Financial Advisory and Execution
Financial advisers may engage with their clients at various levels and the scope of services they offer may vary depending on their skills, capabilities and business model. In several countries, including India, there has been regulatory action in defining the role of various intermediaries that deal with investors. When a relationship manager, financial advisor, wealth manager or other entity, irrespective of the nomenclature used, sells financial products to a client as part of his defined role or business, and earns a commission from the producer of the financial product, there is a potential conflict of interest. The seller of the product may not act in the interest of the client, but may push products that earn a higher commission. This may lead to mis-selling, where a product not suitable to the client’s needs, or not in line with the client’s risk preference may be sold in a manner harmful to the customer’s interest.
One of the regulatory initiatives to prevent such mis-selling is to differentiate between providers of advice and distributors of financial products, and to ask advisers to earn their revenue from the client, and not from the producer. The distributor who executes the transactions in financial products may earn a commission from the producer. The current regulatory regime for financial advisors in India requires that any one offering financial advice for a consideration should be registered with SEBI, and should not earn any income from the producer. There are specific exemptions provided for those that offer advice incidental to a product they may sell.
The following are the various business models in the delivery of financial advice to clients:
a. Fee-only financial planners and advisers : Some financial advisers choose to earn a primary component of their income from enabling clients to plan their finances in a comprehensive manner. They engage closely with the client, offer advice on most if not all aspects of their personal finance, and charge a fee for their services. The fee may be of various types and a combination of the following:
- One-time fee for a financial plan
- Fee for on-going review and periodic revisions
- Asset-based fee charged as a percentage of assets being advised
- Referral fee for engaging experts to take care of specific aspects of the plan
- Referral fee for execution of plan through other agencies
- Selection and portfolio construction fees
- Fees for assessment and analysis of financial position
Fee only financial advisers usually do not take on the execution of the plan or advice. They refer the client to other agencies who may enable execution of the recommended investment transactions. This is to ensure that the commissions earned on selling financial products, does not influence their advice to their clients.
b. Fee-based financial planners and advisers : Some financial advisers offer all the above services that are offered by a fee-only planner, but they also execute client transactions in the financial products recommended by them. They may therefore earn both a fee income for their advisory services and commissions and other incomes from the products that they recommend.
Such advisors let their clients know that they earn commissions by executing the transactions for them; they also provide the client the option to execute their transactions with other service providers.
Institutional advisers such as banks and brokers, have to keep separately identifiable division or department (SIDD) that offers financial advice, distinct from the pure execution services. Both business verticals need to operate independently and with complete transparency and disclosure to clients.
c. Execution only services : Some advisers may not charge their clients for advice, if it is incidental to their core function of distributing financial products. Their income comes from the commissions from selling the product. They may also execute transactions advised by another financial adviser. Such advisers may also distribute a range of products including investment products, insurance products, banking and loan products, which are subject to regulations by multiple regulators apart from SEBI.
Some firms may organise the execution only services into an aggregation model. The aggregating entity has several distributors associated with it, who take a range of financial products to clients. In this case, the company shortlists the products it would offer, based on its selection criteria. It may also have a central advisory team that selects products after research and data analysis. Those that like to offer these products to their clients, may associate with such company, and share their revenue with the company for using their research services, or execution platforms. Many aggregators offer a range of support services to their associates, including training, development, customer relationship management software, execution platforms and facilities that may be expensive to set up on a standalone basis. The shared facility helps the distributors to scale up their business, and pay the aggregator a share of revenue for the benefits offered.
d. Wraps and Platforms : Wraps and platforms are technology-based advisory solutions that are standardised for execution. A client or an advisor associates with the platform, and can offer its financial products as model portfolios that investors can buy. Advisors may also choose these platforms to execute transactions in standardised model portfolios. Clients can view how their portfolios are performing. Advisors can monitor and review the portfolios and holistically manage the money of clients across multiple products.
Wraps and platforms may charge the client a fee and share this fee with the advisor who executes the transactions using it. They may also enable the advisor to access clients using their platforms, to sell financial advice to such clients, and charge a fee and share it with the platform provider.
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