In 2018, NASAA did a study on financial advisors. No, that’s not a typo – that’s unfortunately not NASA the space agency, but NASAA – the North American Securities Administrators Association.
What the study found was that there were eye-opening differences between the way broker-dealers and Registered Investment Advisors (RIAs) operated. Broker-dealers were two to eight times more likely than registered investment advisors to recommend risky investments.
RIAs, on the other hand, generally took a more conservative investment approach overall, “avoiding higher cost, riskier, and complex products. Investment advisers also reported more robust due diligence, disclosure, and conflict management practices,”
Why did this happen? To get to the answer, you need to understand the business model of a broker dealer. In the US, the broker-dealer buys and sells securities, earning a brokerage on every trade. But broker dealers can also be distributors of financial products and earn a commission from products that they sell. This is not unlike mutual fund distributors here in India that earn a commission from investments in the “Regular Plan” of a mutual fund scheme.
How is this relevant for you? The study shows the drastic difference in quality of advice provided purely on the basis of how your wealth manager earns his income.
To a hammer, everything looks like a nail. To a wealth manager who earns a commission, every problem magically seems to have a solution in the specific schemes from which they get the highest incentive.
What is most important for you is to consider products that are best suited to your needs which might not actually be in the best interests of the profits of your mutual fund distributor.
This is why it is extremely important for the incentives of the wealth manager to be aligned with the interests of the client. According to SEBI regulations, an RIA cannot take commission and charge fees to the same client. And, therefore, when you pay fees for investment advice, it becomes crystal clear to you how your advisor is being compensated and gives you a lot more clarity on the quality of the advice.
At Kairos Capital, we are proud to say that we do not take any commissions for the advice we give and purely work on a fee only model. We believe that this is the best way for us to give unbiased advice to our customers and ensure that it is aligned with their needs and priorities. Get in touch with us if you would like to know more about how our services could be relevant for you!