There are many different ways financial advisory runs in India (and worldwide). You must have encountered one of them for sure at some point of time. I have been able to pick 5 financial advisory models and wanted to highlight them and want you to tell me which advisory model you like and which one you hate? & why?
1. Financial adviser earning commissions out of products sold to you
This is the most common advisory model. Also, due to the widespread know how of this model, majority of Indian’s are stuck with bad and unwanted products. In this model the advisor/agent/planner comes to you, pitches the product, makes it look amazing through graphs/projections/emotional-blackmailing and then you buy it. In this model, the commissions are the main source of compensation for the seller. There is no fees paid by you directly to him and you feel like a KING.
2. Financial Advisor with fixed yearly charges
This model is not much widespread, but some people do it. In this model, the advisor/planner (whatever you call), will be available for you throughout the year, whether you need him/her or not. Its kind of yearly contract where he advises you on anything you ask him on your financial life. If in some year you ask more, that’s fine, you pay same fixed cost and in some years if you don’t “consume” his services much, still you pay him the same money. With this model, you are clear about the fixed cost you will incur on your financial advisor and even advisor knows that his cash flows are fixed. This model as per me is one of the best, but sadly this does not work much in Indian environment.
3. Financial Advisor on demand (pay when you want advice)
This model is very much like the above one, but in this you pay your advisor “on the go”. So whenever you take his advice or use his time for asking anything, you pay only for that much time, nothing less and nothing more. Again this model is not that much widespread, but some courageous advisors take this route. This model from one angle is really “american” style, where each thing is paid on “hourly” basis. So if you take 20 hours of your advisor in some year, pay for 20 hours. And if in some year you take only 5 hours, just pay for 5 hours. For advisor it makes his life easy as he spends his time only for what he is paid for and is really committed to produce the value for that time. Indian’s laugh on this model as of now.
4. Financial Advisor on One time payment basis
A lot of advisors work on one time basis, you approach an advisor, you take the service/advice and he works with you till you get what you need and then tata-bye-bye-see you. Financial advisors really try to make sure that there are yearly relationships, but most of the times clients don’t come back after a year as they feel it’s a waste doing it again and again. But some advisors just run on this model. So it really ends up like – “Come, pay the fees, take what you want, and that’s all”.
5. Fees charged as percentage of Portfolio Worth
Call it wealth management or Financial Planning + Wealth Management, in this model a fixed percentage of your net-worth is charged. The yearly fixed fees can be present or missing, but a percentage of your AUM (total worth) are taken by the advisor/planner/wealth-manager. A lot of people feel comfortable with this model as this is linked to their net worth. If there is no increase in their net worth, then no fees to be paid, but if the net worth increases, you give away a part of it in fees.
Which model do you like and why?
Now the question is which model do you like and why? What is the reason you like a particular model and why do you think it should really be encouraged? A plain brainstorming! let’s do it. Leave your comments and express yourself!
Which advisory model will you choose ?