When it comes to distinguishing between the two, it’s quite difficult as both help in investment decisions. This also includes the selection of MF systems. Both are registered entities and administered by different regulators. As the mutual fund distributor is under and controlled by AMFI (The Association of Investment Funds in India). And the investment advisors are controlled by SEBI (Securities and Exchange Board of India).
Before proceeding, first understand a difference. Let’s talk about who is a mutual fund distributor and investment advisor.
Investment Advisor – An investment advisor is an individual or group that provides financing and investment advice. Even oversees securities research for a fee, whether through direct management of client assets or through written publications. If he has sufficient assets to be registered with the SEC, he will be recognized as a Registered Investment Advisor, or RIA. Investment advisers are also referred to as “financial advisers”. He/she evaluates the assets, liabilities, income and expenses of the investor and advises on the investment plan.
Investment fund distributor – They are individuals or legal entities that facilitate the buying and selling of MF Shares to investors. You earn income in the form of commissions for attracting leads (investors) to invest in MF programs. He/she is expected to understand the investor’s situation and risk profile and propose an appropriate investment plan to meet the investor’s requirements.
Earning a commission never means that a mutual fund distributor is allowed to trade the MF program to the investors just to earn a commission. Well, the regulations are very strict in this regard.
Now let’s discuss 8 points that are helpful in distinguishing between a mutual fund distributor and an investment advisor.
Payment mode for advice
We all know that mutual fund distributor is registered with AMFI, they are usually the executors of your investments. The investor asks the mutual fund distributor to buy/sell MF plans for him. As a result, the AMC gives commission to the MFD. To avoid mis-selling MF plans, the SEBI instructed AMCs. Pay only trail commission using the trail-only model. In addition, you may not make any prepayments or prepayments for Trail Commissions, directly or second-hand. Even the competitions or sponsorships would be recognized as an upfront payment. These investment advisers typically charge a fee rather than receiving commissions from AMC. So with this change in the industry investors.
duty of safekeeping
Distributors differ from advisors in that advisors are bound by the duty of safekeeping. This means they are committed to providing honest advice to investors, while distributors are not bound by any such promise.
testing and certification
The exam exam for mutual fund sales and investment advisors is different. Obtain a valid National Institute of Securities Market (NISM) certification for MFD. By completing their NISM Series VA: Mutual Fund Distributors Certification Examination certification exam. For the Investment Advisor, an individual must complete both levels of Level 2:
NISM-Series-XA: Investment Advisor – Tier 1
NISM-Series-XB: Investment Advisor – Level 2
The mutual fund advisor must have certification in financial planning.
Advisors can advise, but not distribute
An MFD has the advantage of being able to recommend the best MF programs. They help an investor understand the benefits of mutual funds, types of MF, and risk factors. They also guide the investor about the MF investment and meet the requirements of the investors. After that, they ask the investor to invest money in mutual funds. They continue to distribute the mutual fund plan. The Investment Advisers provide advice on which MF to invest in but cannot act as a distributor. Your only duty is to advise. After that, the investors make the choice, but the distributor ensures that the investor invests in mutual funds.
Apart from that, the central focus of retail fund sales is on selling the funds. While the job of an MF, the consultant involves various other duties.
Supporting the investor in changing his portfolio
Evaluation of the risk-bearing capacity fund
Choosing the right investment opportunity
Direct plan vs regular plan
A mutual fund distributor gives investors a regular plan and asks them to invest in it. But the investment advisers advise an investor to invest in direct plans. In the past, the MF had to be bought under the guidance of dealers, there was no other option. But in January 2013, SEBI mandated the AMCs to begin direct plans for the mutual funds. This allows the advisors not only to advise investors but also to help them invest in direct MF plans. Direct plans have a cheaper expense ratio than the regular plans. So while distributors may fascinate you with the regular schedules for their commissions, consultants will not.
Note that their level of gathering relevant information varies
Recognizing the need to find general information about your financial profile is the foundation of good financial planning. It must therefore be ensured that the person you trust is interested in asking important questions when it comes to finances. For example, about your goals, income, expenses, long and short term goals, assets, liabilities, tax status, etc. You also need to offer needs-based plans to help you achieve your financial goals, rather than product-based advice. While MFD will likely discuss your requirements with products they commission to market. A financial advisor is expected to offer unbiased advice that meets your needs.
Discuss the factor of risk and return
This factor is usually better discussed by the adviser than the investment adviser. He/she will discuss the risk factors for MF ie high, low, moderate etc. Then he/she will monitor the performance of the MF program over the past years. After that, it is suggested that you invest in the plan. The Investment Adviser will ask the Distributor to provide the investor with an opportunity to invest in a particular MF Plan they are looking for just to meet their financial needs. An advisor would be more interested in assessing your risk appetite. Also set the right expectation in terms of return on investment.
It’s quite difficult to say that a mutual fund distributor or advisor is necessary. Both are an important source for the right investment in mutual funds. From a MF regulation perspective, all individuals, including corporations, who receive an AMFI Certification Number (ARN) are mutual fund distributors, from the highest to the lowest. In distributing the MF programs of various AMCs, they also require advice on many aspects – program selection, asset allocation, tax planning, etc., all within the context of MF programs. The investor therefore has the choice of either contacting a distributor directly or seeking advice on investment funds.
“Invest today – enjoy tomorrow”!