How to select an Hourly-Fee Financial Planner

Hourly-Fees are how lawyers and doctors charge their clients

Note: This is the full / unedited version of my article that was published in Mint on 15th March 2021; This full version includes links and more context

SEBI believes that there is a conflict of interest involved in distribution of (i.e. earning a commission from selling) any financial product such as Mutual Funds (MFs). For example, an MF Distributor may find it extremely difficult to resist selling an MF that pays ten times the annual commission (e.g. 1% p.a.) compared to another MF’s annual commission (e.g. 0.1% p.a.). Hence, SEBI created a category called SEBI-registered Investment Advisers (RIA) in 2013. RIAs charge clients a fee and ideally, they should not earn any commission. So ideally and on the average, an RIA should have lesser conflicts of interest than an MF Distributor. You or your spouse are likely to engage with an RIA at some point in your lifetimes. Hence, it is important to understand some nuances about RIAs.

Fee-Only Financial Planners

You should insist on these three basics. First, the RIA should be registered with SEBI and you can check the same at SEBI’s website which lists all RIAs. An RIA could be structured as an individual or as a company / partnership. Second, there should be a written agreement between you and the RIA. This agreement should clearly state that the RIA will not earn any commission from any financial product. Such a blanket statement covers MFs, insurance investment products, Portfolio Management Services (PMS) etc. Third, let’s focus on RIAs that in addition to providing investment advice (using MFs etc) also provide financial planning services e.g. telling you whether you are saving enough to eventually retire. These are Fee-Only Financial Planners. There are roughly 125 Fee-Only Financial Planners that charge fees that are a percentage of the client’s Assets Under Advice (AUA). The fees typically range between 0.25% and 1% p.a. RIAs that follow this fee structure describe themselves using the generic term ‘Fee-Only’.

Fee-Only (Advice-Only) Financial Planners

There are an additional 25 Fee-Only and Advice-Only Financial Planners (defined here in the US context). Fee-Only (Advice-Only) Financial Planners charge hourly-fees i.e. fees per hour of effort that the RIA specifically put in for a particular client. Hence the fees are not directly based on the client’s net worth. This is similar to how professionals like lawyers and doctors charge their clients. Since this model is at a nascent stage in India, most of these RIAs charge a fixed fee so as to keep the fees simple. For example, total fees of Rs 50,000 during the first six months of the engagement and subsequently a total of Rs 10,000 for each additional six months that the client renews the engagement. If the total fees are more than Rs 50,000 during the first six months of the engagement, then the RIA is likely to explicitly specify the number of hours of effort (e.g. 17 hours) so as to explain the higher total fees. The fees per hour of effort currently typically range between Rs 2,000 and Rs 6,000. Due to the effort required for generic research, regulatory overheads in time and cost, various taxes etc, the hourly fees are likely to increase at more than the rate of inflation. RIAs that follow this fee structure should ideally describe themselves using the specific term ‘Hourly-Fee’ or the US term ‘Advice-Only’. However, since these terms are relatively unknown in India, these RIAs sometimes describe themselves using the generic term ‘Fee-Only’.

Variation between Advice-Only Financial Planners

This is a long-list of Advice-Only Financial Planners and this is a shortlist by an IIT Madras professor (if you ignore the two names with an asterisk next to their names). The 25 Advice-Only Financial Planners themselves differ significantly in three important ways. First, a few RIAs focus on high net-worth individuals who are willing to pay a higher fee to go into more details and to learn the nuances of personal investing. While other RIAs focus on relatively lower net-worth clients who want a low total-fee and hence the number of hours of effort by the RIA have to be minimized. Second, a few RIAs spend more time on research (e.g. why you should avoid ‘factor funds’) allowing them to focus on clients that are knowledgeable about personal investing. While other RIAs have the patience to guide clients that are less knowledgeable about personal investing. Third, a few RIAs are open to additionally engaging with clients in the US etc where taxation limits the set of suitable Indian investment products. Read the RIA’s website and articles to shortlist three that you will speak to. Then go with your gut-feeling about the one RIA that you will formally engage with.

I have provided a list of two Advice-Only Financial Planners to my spouse (and my clients) for them to formally engage with in case of my death. You could do the same.

Avinash Luthria is a SEBI-registered Investment Adviser and Advice-Only Financial Planner at Fiduciaries.in

LinkedIn-Postscript: I covered a few more aspects in this earlier article: “How should you select a Registered Investment Adviser (RIA) to engage with? The most important aspect is the RIA’s integrity. The second most important aspect is the RIA’s intelligence. And the third most important aspect is whether you are likely to get value for your money… The RIA should ensure that the client is not dependent on the RIA”