Most financial products bought by customers are through intermediaries and the former pays a commission for the service availed. But the customer does not pay directly to the agent. For e.g., a 30-year old buying a Rs.10 lakh Jeevan Anand endowment policy pays an annual premium of Rs.37,000 for 30 years. This includes 35 per cent commission of approx. Rs.13,000 in the first year. In the 2nd & 3rd year, the commission is Rs.2,700 (7.5%) and from the 4th year onward it is Rs.1,800 (5%). The commission is a percentage of premium paid and is indirectly paid to the agent through the insurance company. While the customer is aware that agents earn commissions (not sure how much though), he/she does not realise it during the transaction.
Similarly, in the case of mutual funds, the commission earned by distributors is part of the total expense ratio. It is the difference between net asset value (NAV) of the mutual fund bought under direct plan and regular plan. It is paid by fund houses to the distributors on a monthly or quarterly basis. Again here, the investor does not realise it is indirectly paid from his/her pocket.
In the case of banking services, banks levy few charges depending upon the type of account and service availed. These include cash handling charges, fund transfer charges, lack of minimum balance, ATM and debit card charges, etc. The customer does not get a separate bill for these charges, it is adjusted from his/her bank account.
Most of the times, customers are not aware what and how much are they paying for the services availed on financial products. Either they are too busy, not very curious to ask or just do not care. And, these are not hidden charges. It is just that the money going out of their pockets is invisible to them.
On the other hand, registered investment advisers (RIA) charge direct fees on the core advisory services offered under the ambit of SEBI regulations. They are not entitled to earn any commissions on products which come under the ambit of SEBI, thereby facilitating conflict free advice. The customer knows what he/she is paying for as outlined in the agreement, directly pay the fees to the Adviser through proper banking channels and receives a proper invoice for the same. At a psychological level, it somewhere pinches to pay fees directly. Hence, there is this general perception that availing professional competent advice by engaging a SEBI registered investment adviser (RIA) is expensive and only for the wealthy. But this is not always true and is now slowly changing in India. The scope of services offered by SEBI RIAs is different under different business models. Many offer holistic financial planning services while others offer exclusive investment advisory services. Some charge a flat fixed fee with a minimum amount starting from Rs.15,000-20,000 one-time or under an annual engagement. Others charge as a percentage of financial assets managed every year.
It is up to the customers to choose what kind of services they want to avail in the financial services eco-system. Many times, customers end up paying a high cost of free advice which compounds over long periods of time – the cost of buying unsuitable products & the cost of lost opportunity to invest in suitable products. Hence, they should make an effort to educate themselves, know what exactly are they paying for and then decide. There is no such thing as a free lunch in this world! Everything comes at a cost.