Before you invest, know the difference between financial advisor and a distributor

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A wrong financial product can destroy an individual investor’s confidence in capital markets. Mis-selling is frequently linked to the financial industry’s commission-based business model. Financial advisors and distributors are notorious for recommending high-commission products above those that are suitable for their client’s risk profile and investment purpose.

To avoid any conflicts of interest stemming from this structure, the market regulator Sebi suggested amending the Investment Advisers Regulations of 2013 in October 2016 to define the industry’s investment counselling and distribution operations more explicitly.

In July 2020, the Sebi amended the Investment Advisers Regulations of 2013 and named it Securities and Exchange Board of India (Investment Advisers) (Amendment) Regulations, 2020. Further, Sebi, on June 18, 2021, released a framework for the administration and supervision of investment advisors.

SEBI says that any body or corporate body for the purpose of regulating Investment Advisers (“IA”) and delegate administration and supervision of the IAs would be designated as “Investment Adviser Administration and Supervisory Body” (“IAASB”).

Spreading awareness

Sebi has been on a mission to bring more changes for more clarity and transparency for the investors. After Sebi’s several changes, new investors still need to deal with the confusion of product selling and product advising. For them, they are still the same even after the sea of changes.

A financial advisor gives you a complete picture of your financial status. On the other hand, a financial distributor is more concerned with marketing a specific type of financial product, such as a mutual fund, stock, or overseas stock.

As a rule, a financial advisor will be certified in at least one of the following fields: Certified Financial Planner (CFP), Certified Financial Analyst (CFA), or have NISM certifications.

“Under the new guidelines, a financial advisor advises an investor on their investment portfolio. An advisor is expected to charge an advisory fee from the client for the advice provided. In the case of a financial distributor, they are expected to offer investment products in which an investor intends to invest. In such instances, the distributor makes his fees from the product’s company,” said Manish Mehta, Head Sales, and Marketing, Kotak Mahindra Asset Management.

As per the financial experts, investors need to understand their requirements. If you want someone to create a financial plan and handhold you through your financial journey, you may need a financial advisor.

“The advisor will help you understand your life goals, investment objectives, risk appetite, risk capacity, and emotions towards investments. It will be an engagement on a longer-term basis, many times for your whole life. If you already know what you want and have created a plan for yourself, then you may need a financial distributor,” said Anup Bansal, Chief Investment Officer, Scripbox.

However, distributors get compensated based on the products they sell. As a result, they are more likely to promote a product that pays them well. To be clear, this does not imply that they provide their clients with inferior advice, believe experts.

“Simply put, a distributor’s advice can never be devoid of conflict of interest. An advisor is independent in this regard as his remuneration is attached to the customer,” explained Anup Seth, Chief Distribution Officer, Edelweiss Tokio Life Insurance.

Whether one is better than the other is a point up for debate. A customer, however, must be aware of the difference before choosing one.

“Trust also plays a big role, especially when a financial purchase is concerned, and therefore the choice between a distributor or advisor is very individualistic in nature,” said Seth.