What difference does it make whether financial advisors charge fees or earn commissions? 

Whether you are a Mutual Fund Company, an insurance company, a Financial Planner or just a layman seeking financial advice, the question of compensation – of how a financial advisor earns his or her cheque – is a meaningful debate that is and will affect you and your business.

While internationally it may be a hot topic, in India, compensation methods are still only simmering as choices in far and few corners of the country. The financial advisor is largely expected to make his or her money out of the commissions earned on transactions done by his customers or clients.

But what happens when an individual wants advice that does not involve a transaction? Most advisors would provide this kind of help to existing relationships without any direct quid pro quo. A lot of first time clients would become ineligible for such advice since they do not have existing relationships. However rarely anybody notices how non-availability of advice relates to non availability of choice of compensation for advisors. Most people do not see that the service basket to of advisors is limited because of the lack of an alternative revenue model in the financial services industry. If only transaction oriented advice gets compensated, it is difficult for advisors to broaden the range of Services and offer useful non- transaction related advice.

This one track compensation method also unknowingly hinders the effort of the securities regulator viz. the Securities & Exchange Board of India (SEBI). SEBI needs to build on investor education. However the ABC rule says that the largest amount of wealth is likely to reside with the top 20 percent of the population. Most people will think that is a very generous assumption. Real concentration ratios are likely to be worse. So if advisors provide only transaction oriented advice, it is obvious that those people with a higher transaction 'potential' would be served - the top 20%! "Which means that the large masses of people, the 'public' would remain out of bound for advisors or rather the advisors will remain out of bound for the 'public'.

Financial Product & Service manufacturers, such as Mutual Funds and Insurance Companies, use the time tested model of distribution through wholesalers/Agent Managers and retailers/distributors. But in a content intensive industry like financial services,such sales channels reach saturation quite fast. What does one mean by content intensive? Every product has a soft side and a hard side. For example a soap has very little soft side. You buy a toilet soap and take a bath. Small variations in that. On the other had take the example of a computer network. It is not just an aggregation of computers. The most critical part is the networking itself and as most lT People know there is tremendous amount of  time in setting up and maintaining the network. So here we see d huge soft side required to sell the hard side.

In financial services the product is only a structure, the hard side. The understanding of the product and the product being able to provide a financial solution to an individual is of tremendous importance. This high need of Providing the soft side to sell the hard side is what is meant by content intensiveness. Financial Product manufacturers require that their distributors create extensive and intensive relationships with the final consumer. Long term growth also requires that such relationships create financial solutions for the customer. The traditional model, paradoxically, sometimes becomes an hindrance for creating such relationship since commissions narrow down the basket of expertise the advisor may find feasible to offer.

We invite you to kick start a debate on whether there can be an alternative model to the commission based compensation that is currently omnipotent. We want you to tell us what you think is the appropriate way forward and why. We want to know how this affects you and your specific role in the financial markets as a product provider, such as a Mutual Fund or an insurance Company, as a financial advisor and most importantly as an investor or potential buyer of financial advice. Send us at This email address is being protected from spambots. You need JavaScript enabled to view it.