I liked this letter from an IFA to his client, which he was willing to share with me:
I am happy to be of service to you, and here is a small introduction to my services. I am thankful to Mr. Ravi for referring your business to me. This business, like your legal profession, is dependent on references.
The financial planning / wealth business can be looked at in the following parts:
1. The planning portion where I talk to you, understand your requirements, do your risk profiling, and on the basis of your goals, requirements, and risk profiling, suggest appropriate mutual fund schemes and appropriate health and term life insurance.
2. The clerical portion of filling up the form (or helping you with Electronic Forms) and reaching it to the respective fund houses.
3. The clerical portion of putting all the data in a website so that you can access the same whenever you wish to access it.
4. Help you reallocate assets, change Debt Equity allocations based on changing needs.
5. Answer queries regarding your investments during the year.
How am I being compensated:
1. I get a upfront commission for the all the efforts – but it is an insignificant amount – about Rs. 200 per month on your SIP of Rs. 50,000. This works out to Rs. 2400 per annum and I will get it for the next 18 years if you continue this sip till you are 55 years of age.
2. I also get a trail commission as the assets accumulate. This fee and this keeps increasing over a period of time because of the cumulative effort and it is in MY INTEREST THAT I CHOOSE A GOOD FUND FOR YOU! This is about 0.3% of the assets paid on a quarterly or annual basis depending on the fund house.
3. I also have a fee based model where I charge you Rs. 35,000 for the first visit and Rs. 5000 every year – but at your level of investing this is small, because I make sure that you invest in a ‘Direct’ mode thus saving some of the fees charged by the fund house.
Any model you choose is fine as long as you stick to the model for a reasonable amount of time. I do not prefer any model – fee model or commission model or a combination of the two. However please understand that the fee model works well for me ONLY over a long period of time. Thus we need to be together in the long term investment journey of yours. In case you wish to change the model halfway through the journey, I will charge you Rs. 35,000 for a part of the year also.
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