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Wreaking havoc in lives and dragging millions into a financially messy situation, the past 15 months were haunting to say the least as the Covid-19 pandemic came as an unexpected curveball. However, the pandemic-led insecurity over finances is proving to be a key propeller of self-awareness among investors towards the need for personal finance. Insurance and investments are no longer push products. People themselves are pulling towards it. However, not all are approaching it in the correct manner.

A lot of people don’t understand the importance of correct financial advice. Their advisors are friends and colleagues, bank relationship managers, insurance and mutual fund distributors or at best charted accountants. Most people have not even heard about registered investment advisors (RIAs). Moreover, there are just about 1,300 SEBI-registered RIAs in India.

“The concept of RIAs is new. Not many people know about them. They don’t even know they need an advisor. Mostly people earning in the range of Rs 15-20 lakh per annum start to think about structured financial planning,” says Vijay Kuppa, co-founder, ORO Wealth, a corporate RIA firm.

Who are RIAs?

RIAs are individual financial advisors or advisory firms who advise the clients on financial planning. Not all in the investment business are qualified to impart advice. All RIAs are Sebi registered. They are the ones legally authorised to give advice to the clients – not the bank RMs, insurance, mutual fund or tax advisors. Certainly not, stock brokers.

RIA’s job is to guide people with investments. They don’t sell products. Thus, they only charge you for advice. The execution of advice is not up to them. Even if they do execute it, they will sell investment products with zero commission. For example, ORO Wealth enables investors (retail and institutional), offline intermediaries and businesses to access zero-commission investments and unbiased advice. Paytm Money is an RIA that sells zero commission direct plans on its platform.

Do you need one?

When you reach out to the people who are also in the business of selling products, there comes conflict of interest — even if their interests are genuine. There could be some bad apples selling you costly investment products that may not be suitable for you, but earn them good commission. Sebi has ruled out such a situation once and for all. It has categorically set the record straights. Product distributors cannot impart advice, and RIAs cannot sell products. The ideal approach is to approach an RIA for financial advice. Execute the advice yourself or with the RIA’s help in zero commission products. One may also reach out to product distributors for execution.

How much they charge?

The fees that RIAs charge are on the higher side. Low-salaried class may not be able to afford it. As per Sebi guidelines, there are two modes to charge fee – Assets under Advice (AUA) Mode and Fixed fee Mode. “The maximum fees are capped at 2.5 per cent per annum on the AUA mode and Rs 1,25,000 per annum per client – both further subject to many conditions laid within. Hence, the basis of an investment advisor charging a client could be within these two larger modes,” says Rajesh Krishnamoorthy, Country Head, Financial Planning Standards Board.

He explains further with an example: “A fee only advisor could state a per hour fee for consultation and further review, a specific fee for writing a financial plan which could be a one-time fee so long as the total of all such fees charged to client in any given year is within the fixed fee mode cap prescribed by SEBI.”

Can RIAs lower their fee to cater to the low-salaried audience? The rules are designed in a way that RIAs will not be able to do it.

“The fee structure and compliance need relaxation. Very few people understand the importance of financial advice. This makes it difficult for RIAs to make a business out of it. Secondly, an individual RIA has to apply for corporate licence after he has 150 active clients onboard. In that case, he needs to hire more people, but Sebi has defined qualifications for hiring too. Hiring highly qualified people requires cost. All these factors are naturally driving the industry to high-net worth individual clients,” says Kuppa.

While RIAs at present may not be affordable for many, but things are moving towards the right direction. The discussions with the Sebi are ongoing.

“As we evolve, regulations pertaining to financial planning, the regulators would also look at how can “advice gap” be minimised in the country. Everyone has to contribute to these conversations, and I see the question on affordability getting answered,” says Krishnamoorthy.

Meanwhile, efforts are needed on financial literacy. Personal finance must be taught to children in schools.

“Children should grow up knowing what money is, what are the dos and don’ts when it comes to money matters and foundations of personal finance. Wealth or having a lot of money is not a prerequisite to learning. Neither are they a prerequisite to planning. In fact, I argue that proper financial planning helps one create wealth in the long run,” says Krishnamoorthy.