India’s retail equity investment culture is maturing, or so it would seem. Consider these facts: there are over 11.2 crore demat accounts, over ₹40 lakh crore in assets under management in mutual funds and a monthly SIP (systematic investment plan) book of nearly ₹13,700 crore. Data here is from depositories NSDL and CDSL, and industry body AMFI.

Yet, scratch the surface and there are multiple points of concern. Nithin Kamath of Zerodha was on record saying the number of active demat accounts with more than ₹10,000 was estimated to be just three crore. AMFI’s data shows that the average ticket size of a retail investor’s mutual fund account was ₹70,755. Only 44.4 per cent of the equity assets remain invested for more than two years. And the SIP stoppage ratio (number of new SIPs opened to the ones stopped) touched a new high of 0.68 in February 2023, up from the usual 0.48-0.5 levels seen earlier. You would expect more SIPs to be started to take advantage of the volatile markets in the last 18 months; however, the opposite has happened.

But you hear of more people dabbling in futures and options, and losing their money even as the market regulator put out a report stating that most F&O traders made losses.

It would be easy to blame all this on weak market conditions or just reckless individual investing or unaccountable social media FinFluencers. But much of this has to do with the kind of decision-making process (or its absence) that retail investors follow. It has to do with the lack of handholding and the right kind of advice being taken for investing in suitable avenues. Chasing fads or ‘flavour of the season’ investments without guidance, and on a whim, leaves most investors disappointed.

Therefore, most investors would do well with some level of handholding.

That is the aspect that we would like to emphasise here. Mutual Fund Distributors (MFDs) and Registered Investment Advisors (RIAs) are the most sought-after ones for financial advice, though the former have a more restricted role.

How do you make the choice between an MFD and an RIA? We seek to answer this in two parts. First, we describe what each of these entities can and cannot do. Then, we look at the factors that must guide you towards making an informed decision while choosing between the two.

What MFDs and RIAs can offer

Distributors must pass the NISM certification relating to mutual fund distribution and register themselves with AMFI.

A distributor can (or rather must) assess the risk appetite and suitability of schemes before recommending them to her clients. She is also allowed to give you incidental advice – which is not very rigidly or clearly defined. Therefore, a distributor can give an indication on asset allocation and, based on risk assessment, suggest funds. She cannot provide comprehensive financial or investment or tax planning services,

An MFD gets 0.1-2 per cent in commission from the fund in which her clients invest. The investor doesn’t pay anything to the distributor. Onboarding of clients – filling up forms, completing KYC norms and submitting proofs – is done online as most MFDs are empanelled with large corporate distributors.

For an investor taking the MFD route, the return that she makes from the fund choice is the final return, as the NAV includes commission payments.

An RIA is more involved in the sense there is a fiduciary duty on behalf the client. In this case, the RIA needs to pass two levels of NISM investment adviser certifications. Further, all persons practising with her (representatives and partners) must satisfy the qualification requirements.

The RIA can give complete financial, investment and tax advice to clients, but cannot claim commission from any products being recommended. Detailed records in terms of risk assessments, product recommendations and processes are needed.

For her services, an RIA charges a fee that can be fixed or a percentage of assets under management/advice. Fee is charged based on time spent, complexity of the advice, amount invested and so on.

SEBI has capped the percentage of assets charges at 2.5 per cent a year, though most charge much less than that. For fixed fee, the limit is ₹1.25 lakh per year, per person.

An individual RIA can service up to 150 clients and has a minimum net worth criteria of ₹5 lakh. Beyond the 150-client limit, the individual RIA must either stop taking fresh clients or must move to a corporate RIA licence afresh with ₹50 lakh net worth requirement.

A corporate RIA can give detailed financial advice and distribute products, but not both to the same client.

From an investor’s perspective, the returns must be calculated after accounting for the fee paid to the RIA, which may not be simple. Unlike in the case of the MFD, product returns aren’t the same as final returns with an RIA.

Making the choice

Deciding between an MFD or RIA may not be as straightforward as you imagine. The choice would be clear if it is based on a few factors that help you crystallise the kind of assistance you require in dealing with your finances.

Ticket size: Let’s say you started off on your career recently or are in the early stages of your work life with a relatively modest sum to invest (₹5,000-₹10,000) every month. You just want 2-3 mutual funds to launch your investment journey, perhaps an ELSS to begin with.

In such a case, a mutual fund distributor would be better, for you just need simple advice on investing in a few funds. Besides, for someone new to investing, the documentation can be overwhelming at times and a distributor would do the needful for you comfortably. Your distributor may also be an insurance agent and could help you additionally with term and health covers right at the start.

Going to an RIA may be expensive early on. If a client can invest, say, ₹10,000, every month and the RIA charges a flat ₹10,000 as fee, you would end up paying 8.33 per cent as fees for one year (₹10,000/₹1,20,000).

Again, if you are just looking for a couple of funds for long-term investments to make the best use of your yearly bonus, a distributor may handhold you better.

But if you can invest, say, ₹50,000 every month, and pay the same ₹10,000 as RIA fee, it would amount to only 1.67 per cent (₹10,000/₹600,000) expense ratio a year.

Life stage, complexity: Over a period of time, in your mid-career phase, your earnings are likely to have improved. You may have a working spouse, perhaps children, and would be looking at saving for various goals — children’s education, marriage, house purchase, retirement, and so on.

Given that two incomes have to be channelised for suitable investments and optimised for taxes across multiple products other than just mutual funds, you may need comprehensive plans and periodic reviews. Besides, there may be loan EMIs to deal with.

In such cases, an RIA may be better suited for a more systematic approach to achieving life goals.

A very seasoned distributor with an excellent track record — and who perhaps has guided you well since you started investing in your younger days — may also be considered. But with a multi-product portfolio that is large, you may be better off with an RIA.

Another scenario could be that of a DIY investor who has invested in all kinds of products — mutual funds, direct stocks, bonds, insurance policies (ULIPs) and even cryptocurrency.

Such an investor may have parked money in various avenues or just a few and yet accumulated a large corpus. But the portfolio may be quite unwieldy and without any specific focus. The investor herself may have a decent understanding of investments and markets (may be not at expert level). But she may have little idea of asset allocation, financial planning and so on, but importantly would have the discipline to invest regularly, though not in the right instruments. Such an investor would be better off with RIAs, so that her portfolio is mended suitably — and with a few sittings over a few years, she may continue to be on her own, but with better focus.

Execution and operational aspects

One key point to note about going to RIAs is that not all of them provide the execution facility as well. So, from which portals to invest, say, direct plans of mutual funds, to how to go about the paperwork, etc., may seem daunting to many, especially those who are not tech savvy. RIAs, who do offer the onboarding facility as well, may charge more as fees.

Those with large, complex and multi-product portfolios — and looking for comprehensive plans — must opt for the RIA route. If investors are tech-savvy and can take care of the operational and execution part as well, it would be that much easier. But if they aren’t and don’t mind paying a bit more, that would also make the case for RIAs stronger.

If your RIA offers just advisory and no execution facilities, and you yourself are in the dark about operationalising the advice, you may either have to change your RIA or become savvier about tech and paperwork.

Those taking the MFD route generally do not have to worry about the execution part, as the onboarding for most is online. Even if some physical running around is required, most MFDs do that for you. Besides, the slightly more informal set-up with an MFD means that your friendly distributor would constantly keep you informed on regulatory changes – 2-factor authentication for SIPs, PAN-Aadhaar linkage, compulsory nomination or opting out are some recent examples.

A note about fee and investment advice

Most investors require guidance – some more and others less, may be. Obsessing over fee paid or distribution commission isn’t always good. As an investor seeking advice, your priority must be to beat inflation convincingly, reach all your life goals comfortably and retire peacefully – in other words, attain financial freedom. Whoever gets you there is suitable advisor for you.

Handholding an investor and providing suitable advice through tough market phases – 2008, 2013, early 2020, late 2021 to mid-2022, for example – apart from helping them manoeuvre geopolitical tensions, central bank actions and regulatory diktats, without taking any hasty decisions, is critical.

Social media handles, blogs and news channels can highlight many avenues – even genuine at times, though we aren’t sure about any vested interest or conflict of interest involved. But what is suitable for your goals and risk appetite is another ball game altogether.

Therefore, there is a need for genuine advice. And there are no free lunches available.

Whether it is distribution commission or investment advisor fee based on a percentage of AUM or AUA, they keep recurring. With a fixed fee RIA, too, you need to pay for every annual review and calculate your returns post the payment.

There may be times when even the supposedly objective RIAs may be hesitant on certain actions. Let’s say you have a home loan running and, given the current high interest, wish to prepay the loan with the still hefty gains that you are sitting on from your stocks or mutual funds with the 2020-21 rally. If you are on a percentage of assets fee mode with your RIA, will she readily agree to liquidate some units of mutual funds if it means lower share of revenues for her? The case is even more pronounced with distributors.

But that is a problem with finding the right advisor, which is another issue altogether. Here is an article that could help.