Is it time to move to Fee-Only financial planners?

India has a very progressive capital market today. A decade back mutual funds, PMS (Portfolio Management Scheme), etc. were not as popular while traditional financial products such as Fixed Deposits (FDs), insurance policies, real estate, gold, etc. were the preferred investment options for the masses. However, due to social media and efforts made by SEBI (Securities Exchange Board of India) and AMFI (Association of Mutual Fund in India), people are progressing towards mutual funds, PMS and the like. That said, people still feel that they don’t need a financial planner and if they feel they need one they want them to work for free.

These days, we go to a specialist doctor even for a minor ailment. When it comes to child’s education people spend a lot of money on finding a good tutor. Even we hire a personal trainer in gym to exercise better to maintain our health. But when it comes to money, people rely on free advice given by friends, relatives and internet. So, even if for a minor ailment we consult a specialist then when it comes to our personal finances why not go for a certified professional who would work in your interest.

To simplify it let us first understand what is the difference between 'Fee-Based' and 'Fee-Only' financial planners. Fee-based financial planners are those who charge you upfront fees for financial planning and also receive commissions from product manufacturer for investments made by you through them. On the other hand, fee-only financial planners are those who may either charge fixed fees or variable fees or a combination of both.

Now speaking in terms of regulations, fee-only financial planners are regulated directly by SEBI under SEBI Investment Adviser (IA) Regulations, 2013. While, fee-based financial planners who are typically product distributors are not directly regulated by SEBI. However, SEBI is planning for and SRO (Self-Regulatory Organization) for such intermediaries.

When it comes to advice, there is a possible conflict of interest and bias when it comes to fee-based financial planner, as they get paid by the product manufacturer and there is possibility that they might recommend those manufacturers product fetching higher commissions. On the contrary, SEBI has directed those working as a fee-only financial planners should work as a fiduciary and should give advice which is in client's best interest. As fee-only financial planners only revenue source is the fees that you pay, there is no conflict of interest whatsoever.

However, there is all the way different story of fee-only financial planners. When it comes to fee-only financial planners the community is broadly divided into two parts. The one who charge the fixed or flat fees upfront and the other who charges on your assets in addition to the upfront fixed fee where assets are usually financial assets such as mutual funds, stocks, insurance, etc. Now the one who charges on assets there is possibility of personal bias, as there is a possibility that he would be much more interested in bringing more assets under his/her purview which is not in case with the one who charges flat upfront fee and doesn’t charge anything on your assets. Frankly speaking such financial planners are truly fee-only financial planners as they don’t carry not even a minor bias and are supposed to be neutral in his advice, as he only gets paid for the advice and not for the assets you hold or bring in.