RIA Investments charge a fixed fee for consulting and A may not be in favor of it either because he cannot afford it or for some other reason. RIAs also charge a renewal fee to review the financial plan every year.
With MFD, there will be no upfront fee for the investor. They get paid a trailing commission from the asset management company (AMC), which, in turn, collects this commission from the investors themselves. Since there is no upfront fee, it may tempt A to invest through MFDs. However, A will still pay the MFD, albeit indirectly, and for the period he remains invested in the MF scheme.
RIAs help you to invest in direct plans of MF scheme, whereas MFDs sell regular plans of the same MF scheme. The commission on the regular plan is higher as compared to the direct plan.
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Which route is better, you wonder? Let’s get to the hardcore numbers.
RIAs usually charge a fixed fee from 20,000 35,000 per annum in the first year and a lesser amount in the next year as renewal fee. If an RIA charges 20,000 more in the first year 10,000 after that, then the amount of the total fee (including GST) paid will be 70,800 for five years. Assume an annual return of 12% Monthly investment of Rs 10,000 in Systematic Investment Plan (SIP), will get returns after fees 7.54 lakh for a holding period of five years.
If A invests in the same MF scheme through MFD, we can assume an annualized return of 11% 10,000 monthly SIP. The remaining 1% will go to the MFD in the trailing commission each year. So, the amount of a regular plan giving 11% return per annum for five years will be 8.02 lakhs.
Clearly, investing through the MFD route appears to be more profitable over a period of five years. However, this scenario changes to a great extent in the long run you hold the investment.
If you stay invested through RIA for the next 20 years, the return after fees will be 97.43 lakh as compared to 87.35 lakh in case of MFD, a huge difference 10 lakhs. (See accompanying chart.)
Should everyone then invest through RIAs? Note that there are not enough RIAs to cater to the growing number of MF investors. Data from market regulator SEBI shows that there are around 1,300 RIAs. Individual RIAs can only onboard 150 clients. Furthermore, the compliance process is very stringent which makes the RIA model unviable unless high-net-worth individuals with large AUM (Asset Under Management) sizes are your clients.
Neeraj Dugar, Co-Founder and CEO, Holistic Wealth, says, “RIAs may prefer to induct new customers every year over renewing relationships with existing customers as the renewal fee from existing customers will be lower and their revenues will reach a certain level. But will be limited.”
Furthermore, individual RIAs suggest only suitable products. The investment part is to be executed by the investors. There are some fintech platforms like Kuvera, Grow and Paytm Money which have RIA license and sell direct MF plans, but they will not help in direct investment.
“If you are hi-tech and know which products to buy, you can save money and invest through tech-enabled platforms. However, high-touch and low-on-tech person should prefer RIA. Once you know where to invest, you can execute it through fintech platforms,” says Vivek Rege, Founder & CEO, VR Wealth Advisors Pvt Ltd.
What investors should know
Holding an RIA license does not guarantee that the RIA will be ethical. Similarly, not all MFDs will have vested interests. The person advising you should be competent enough to handle your money. “The most important aspect of choosing financial planners is their background. Go for a consultant who has a strong research background and avoid people with banking and sales experience. How much AUM an MFD or an RIA handles doesn’t guarantee they’re good at research,” says Holistic Wealth’s Duggar.
Ask relevant questions. Rege recommends that please check whether the distributors are listed on AMFI website or RIA on SEBI website.
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Where the amount involved in SIP is less, you can start your investment in index funds through platforms that provide direct plans to you. Also, if you need complex counseling, you should go to the RIA. An RIA can not only suggest MF products but also take care of aspects like tax and wealth planning and cash flow and risk management. If you are investing for a specific goal and just want advice on MF investing, choosing an MFD would be a better option.