How is a mutual fund dealer different from an investment adviser?

When it comes to differentiating the two, it is quite difficult to do so as both help in making investment decisions. That implies choosing MF schemes as well. Both are entities registered and managed by different regulatory bodies. As the Distributor of Mutual Funds it is under and controlled by AMFI (The Association of Mutual Funds in India). And investment advisers are controlled by SEBI (Securities and Exchange Board of India).

Before we go any further, first understand one difference, let’s discuss who is mutual fund dealer and investment adviser.

Investment Adviser: An investment adviser is an individual or group who provides investment and financing advice. It even manages stock research for a fee, either through direct management of client assets or through written publications. If you have enough assets to register with the SEC, you are recognized as a Registered Investment Adviser or RIA. Investment advisers are also known as “financial advisers.” He/she makes an evaluation of the investor’s assets, liabilities, income and expenses and advises the investment plan.

Mutual Funds Distributor – They will be people or entities that facilitate the purchase and sale of MF units to investors. They earn income in the form of commission for bringing in potential clients (investors) to invest in MF schemes. You are expected to know the investor’s situation, risk profile and suggest a suitable investment plan to meet the investor’s demands.

Earning a commission never means that a mutual fund dealer can market the MF scheme to investors just to earn a commission. Well, the regulations are very severe in this regard.

Now let’s discuss 8 points that help differentiate between a mutual fund dealer from an investment advisor.

• Modality of payment for advice

We all know that the mutual fund dealer is enrolled with AMFI, they are usually the executors of your investments. The investor asks the mutual fund dealer to buy/sell MF plans for them. In doing so, the AMC commissions the MFD. To prevent misselling of MF plans, SEBI has directed AMC. To pay only the tracking commission using the tracking only model. Also, do not give any commission up front or advance any direct or second-hand test commission. Even contests or sponsorships would be recognized as an advance payment. These investment advisers typically charge a fee in lieu of receiving commission from AMC. So with this change in industry investors.

• Depository duty

Distributors differ from advisers in that advisers are subject to a depository duty. That implies that they are committed to giving investors honest advice, whereas dealers are not bound by such a promise.

• Exam and Certification

The exam exam for both mutual fund dealer and investment advisor is different. For MFD obtain a valid certification from the National Institute of the Stock Market (NISM). By passing your certification exam NISM VA Series: Mutual Fund Dealer Certification Exam. For Investment Adviser, a person must clear both levels 2 levels:

1. NISM-Series-XA: Investment Adviser – Level 1

2. NISM-Series-XB: Investment Adviser – Level 2

The mutual fund adviser must be certified in financial planning.

• Advisors can advise but not distribute

An MFD has a plus that they can advise for the best MF schemes. They help an investor understand the benefits of mutual funds, the types of MF, and the risk factor. They also guide the investor on the MF investment and meet the demands of the investors. After that, they ask the investor to invest money in mutual funds. They keep distributing the mutual fund plan. Investment advisers give advice on which MF to invest in, but cannot work as a dealer. Your duty is only to advise. After that, the investors choice, but the dealer, makes sure that the investor invests in mutual funds.

• rights differentiation

Other than this, the core focus of a mutual fund dealer is the distribution of the funds. While the job of an MF, the adviser involves several other duties.

1. Help the investor to change his portfolio

2. Registry mantenance

3. Assessment of risk-taking capacity funds

4. Choosing the right investment option

Direct Plan vs Regular Plan

A mutual fund dealer will give the Investor a regular plan and ask him to invest in it. But investment advisers advise an investor to invest in direct plans. In the past, the MF had to be purchased under the guidance of dealers, there was no other option. But in January 2013, SEBI ordered the AMCs to start direct schemes from the mutual funds. This allows advisors to not only advise investors, but also help them invest in direct MF plans. Direct plans have a cheaper cost ratio than regular plans. So while distributors may wow you with regular plans for their commissions, advisors won’t.

• Please note that your level of collection of relevant information differs

Recognizing the need to find general information about your financial profile is the foundation of good financial planning. Therefore, it is necessary to ensure that the person you trust for finances is interested in asking important questions. Like about your goals, income, expenses, short and long term goals, assets, liabilities, tax status, etc. They should also offer needs-based plans to reach your financial goals, rather than product-based advice. Although it is likely that MFD analyzes your demands with the products that they are in charge of marketing. A financial adviser is expected to offer unbiased advice to meet your needs.

• Discuss the risk and return factor

This factor is usually discussed by the adviser to a greater extent than the investment adviser. He/she will discuss the risk factors for MF, ie high, low, moderate, etc. Then she will look at the performance of the MF scheme in recent years. After that, she will suggest that you invest in the plan. The investment advisor will ask the distributor to convince the investor to invest in a particular MF plan that he is looking for just to meet his financial needs. An advisor would be more interested in assessing your risk appetite. Also, set the appropriate expectation regarding the return on investment.

Conclusion

It is quite difficult to say that a mutual fund dealer or adviser is necessary. Both are an important source for the right investment in mutual funds. From the point of view of MF regulation, all people, including companies, who obtain the AMFI certification number (ARN), are mutual fund distributors, from the highest to the smallest. In the way of distributing the MF schemes of different AMCs, they also need advice in many ways: selection of schemes, asset allocation, tax planning, etc., all in the realm of MF schemes. Therefore, it is the choice of all investors whether you want to contact a dealer directly or want mutual fund advice.

‘Invest today – Enjoy tomorrow’!