Suppose you are interested in mutual funds. Do you contact Mutual Fund Distributors (MFDs) or Investment Advisors (IAs)? Read this to find out how they are different and to learn whom to contact for what. After all, you don’t want to be the person who goes to the post office and asks to buy a bar of chocolate—IYKWIM.
Understanding the roles and responsibilities of mutual fund distributors and investment advisors
Mutual fund distributors are not the same as investment advisors. So if you’re planning to invest in mutual funds, it would help to know the difference between them.
Who is a mutual fund distributor?
A Mutual Fund Distributor or MFD provides details about different mutual fund schemes. They help with the purchase/sale of mutual fund units/shares. A distributor registers with the Association of Mutual Funds in India (AMFI). They offer all kinds of help—from choosing the right fund to assisting with paperwork. Essentially, they see you through the whole process of investing in mutual funds.
Who is an investment advisor?
An Investment Advisor or an IA provides advice on investment matters. The advice can pertain to a range of topics, such as portfolio management, asset allocation, and financial planning. The advisor must register with the Securities and Exchange Board of India (SEBI). They must also have the requisite qualifications and experience and follow the code of conduct.
Similarities and differences between mutual fund distributors and investment advisors
Different as they are, there are some similarities between MFDs and IAs. To name a few:
- Both provide financial advice and extend investment-related assistance to their customers.
- They are expected to comply with SEBI regulations.
- They receive fees/commissions for services rendered
Services provided by mutual fund distributors and investment advisors
MFDs and IAs offer very different services. This section should help you differentiate between the two even better.
|Registration||AMFI registration||AMFI registration|
|Qualifications||No qualifications required||Must have qualifications like National Institute of Securities Markets (NISM) IA Certification, or Certified Financial Planner (CFP)|
|Services offered||Restrict services to the sale and distribution of mutual funds||Offer a bouquet of financial services|
|Charges||Get to take home a commission for selling mutual funds||Charge a fee for managing the assets or planning finances|
|Scope of responsibility||Ensure that the product meets the customer’s requirements.||Assumes fiduciary responsibility|
Mutual fund distribution services
MFDs offer the following services:
- Creating a mutual fund portfolio that aligns with the customer’s financial goals
- Helping customers choose the schemes that suit their objectives and risk appetite
- Assisting with the paperwork and procedures
- Monitoring and reviewing the performance of customer portfolios to help the customer decide on a further course of action
- Advising customers on tax-saving schemes and when to sell for the maximum tax benefits
Investment advisory services
Providing the following services falls within the IA’s scope of responsibility:
- Helping customers plan their investments in accordance with their financial goals, objectives, and risk tolerance
- Scrutinizing customer investment portfolios and offering advice to optimize returns
- Guiding customers on how to spread the investment across different asset classes, like equity, debt, etc.
- Evaluating investment opportunities in alignment with the customer’s goals and making recommendations
- Helping customers diversify their portfolios to minimize risks and protect their capital
- Recommending avenues for tax-saving investment options and reducing customer tax liability
- Offering customers advice on how to achieve retirement goals and also assisting in the creation of wills, trusts, etc.
A comparison of services
Both MFDs and IAs offer investment advice, but there are a few differences when it comes to their services. The former focus only on mutual funds, while the latter offers a broader range.
Compensation and regulation of mutual fund distributors and investment advisors
MFDs and IAs also differ in terms of their compensation structures and regulations. Let’s delve a bit deeper into this aspect of their differences.
The compensation structure of mutual fund distributors
Two kinds of compensation can be made to MFDs:
- The upfront commission is paid when you invest in a mutual fund.
- Trail commission, which is paid on a regular basis for the duration of investment—however long that is.
The compensation structure of investment advisors
There are four types of compensation paid to IAs:
- Commission-based: A percentage of the transaction value of investments recommended.
- Fee-based: A fixed amount, an hourly rate, or a percentage of the assets being managed.
- Performance-based: A percentage of the profits that the portfolio makes or a performance fee
- Hybrid: This is a combination of the above three types. Charges apply accordingly.
Regulation and compliance requirements for mutual fund distributors and investment advisors
So far as regulation compliance goes, both should:
- Register with SEBI, follow the code of conduct and comply with Know Your Customer (KYC) norms
- Ensure a product’s suitability to meet customer’s objectives
- Conduct a risk-profiling exercise for their customers before recommending any product
- Fully disclose complete material facts about recommended products and continuously share periodic performance updates
- Maintain proper records of all customer interactions
- Have their books audited annually
- Keep updating their knowledge of the latest developments and required skills
The role of SEBI and AMFI in regulating mutual fund distributors and investment advisors
SEBI regulates and monitors the functioning of mutual funds and all intermediaries. It sets guidelines to ensure ethical and transparent practices to protect investors’ interests.
AMFI works with SEBI to ensure compliance and protect investors’ interests. Any grievances against intermediaries go through AMFI.
Choosing the right professional for your investment needs
When you are looking for a professional advisor or manager of your funds, you need to take on board a variety of factors. Some of them are the subject of the discussion below.
Factors to consider when choosing between mutual fund distributors and investment advisors
Choosing the right professional for you depends on your answers to the following questions:
- What services do you need?
- What are the fees/charges?
- Are they knowledgeable?
- Are they objective in approach?
- Are they accessible?
How to evaluate the qualifications and experience of mutual fund distributors and investment advisors
While evaluating the qualifications and experience of MFDs and IAs, you may want to consider asking the following questions:
- Do they have certifications?
- What is their experience?
- Are they regulation-compliant?
- What do their other customers feel about them?
- Are they transparent about their fees/charges?
- How knowledgeable are they?
The importance of understanding the fees and commissions associated with mutual fund distributors and investment advisors
It is critical to understand the fees and commissions as that would directly impact the cost and value of the investments. So make a note of this right at the beginning and factor it in while choosing an advisor.
The role of ongoing communication and monitoring in building a long-term relationship with mutual fund distributors and investment advisors
Your relationship with your MFD or IA will be an ongoing, long-term one. Therefore, it is as important to pick someone you can communicate with easily as it is to pick a competent person. It helps to build a healthy relationship and create a two-way information channel. Understanding your needs and goals better will help the investor make the right and timely decisions.
While both MFDs and IAs provide investment advice to investors, some of their services differ. We hope this article has left you a little better placed to choose the option that’s right for you.