I liked this letter from an IFA to his client, which he was willing to share with me:

Dear Sir,

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.

Caveats:

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.

 

  1. Such letters should make it clear that 35K +5K pa model is for actions 1-5.

    In fact, it is best to charge higher for the ‘direct’ model and explicitly state why.

    Ideally one could also point out that the commission based model will provide the IFA data feeds from the AMC which might (‘might’) aid fund management.

    Trouble is many IFAs seem to be saying, that without the data feed they will be unable to help the client. Which is complete nonsense and a clear conflict of interest.

  2. data can always be entered in Valueresearchonline.com, Iriswealth, or Moneycontrol – data feed is useful only in case of large Liquid investments where daily entering could be a pain.

    Also I am sure that these websites can start a paid model by which I can authorise a Fund house to send the data to my portfolio – say it could be priced at 1000 a YEAR…and access of this could be given to the IFA and the client. Simple.

    I would love such a model where the client shares his goals and portfolios and I tell him ‘hey u are fine, just make this change’ and charge him/ her say 5k per year – 2 reviews. Makes sense and I could also say ‘get out of MF and be in bank fd…’ because i am not aum compensated….and i could do more clients and without worrying about who I a dealing with. Assuming of course that the cash comes 🙂 lol

  3. Since this is an old post, I am not sure if this comment would be responded to but I thought of giving it a try. As per the SEBI regulations the advisor needs to keep the execution/distributor part of the business at arms length to ensure that there is no conflict of interest. Given that, I am not sure how this financial advisor is giving this option to his client. I am more so confused on the combination of the two models that he had given as an option.

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