How to choose a financial advisor?

Recently Sebi has proposed to amend the requirements for an individual to become a Registered Investment Advisor (`RIA’). Accordingly, this prompted us to review the qualifications and experience required for becoming eligible to sell different financial products. Currently, there are regulations that require qualifications, certifications and experience for selling the following financial products;

1. Mutual Funds
2. Life and general insurance products
3. Pension funds and products
4. Portfolio Management Schemes
5. All financial products as a Registered Investment Advisor (RIA)

The qualifications, certifications and experience required for each of the above are as under:

Mutual Fund Distributors (MFD) are required to pass an exam conducted by the National Institute of Securities Market (`NISM’). The exam is called the NISM VA – Mutual Fund Distributors Certification Exam. It is a two hour exam with a pass percentage of 50 percent. NISM is a public trust established by Sebi. Its aim is to carry out a wide range of capacity building activities aimed at enhancing the quality standards in securities markets. Mutual Funds are regulated by Sebi and the association of mutual funds in India is called AMFI. There are no minimum educational qualifications required to become an MFD. Further, there are no experience requirements too. Once the person has cleared the exam, she can apply to AMFI for an MFD license. The license is granted for a period of three years. On completion of three years, the license can be renewed for another three year period by either passing the same exam again or attending a one day CPE course wherein the new developments in the Industry are explained to the participants.

There are approximately 1.47 lakh mutual fund distributors. An individual can become a mutual fund distributor as well as a corporate. A corporate can have many employees who sell mutual funds under their license. All these employees also need to pass the NISM exam and get an EUIN (Employee Unique Identity Number). The purpose of the EUIN is to identify the employee in case of any complaints by the investors. Accordingly, EUIN has to be compulsorily mentioned in the application form else the same can get rejected.

The Industry has around 2.5 lakh personnel selling mutual funds. The largest distributors are the aggregators like NJ India Invest. They do not have employees selling mutual funds. Individual distributors can become sub-brokers of large aggregators like NJ and sell through them. These companies are able to negotiate higher rates with Mutual Funds and they pass on most of their income to the individual distributors. The individuals get access to the platform as well as get training and other marketing collateral which helps them build their business.

The other large distributors are banks who are able to cross-sell third party financial products such as mutual funds and insurance to their customers. Large private banks and foreign banks have substantial assets in Mutual funds which adds a lot to their top and bottom lines.

The Insurance Regulatory and Development Authority of India (IRDAI) is the regulator of the life, general and health insurance companies in India. In order to become a life insurance or a general insurance agent, one has to appear and clear the licensiate exam conducted by the Insurance Institute of India. A minimum qualification of passing the tenth standard exam is also required. Two papers have to be cleared for becoming either a life or a general insurance agent. The pass percentage is 60 and the exam has multiple choice questions. Most insurance companies will arrange training to appear for these exams.

There are twenty six life insurance companies in India. The Industry has collected Rs 37,800 crores for individual regular premium policies in the current FY 25 as compared to Rs 33,000 crs in the same period last year. Individual single premium amounted to Rs 10,550 crores and Group single premium was a huge Rs 70,323 crores. Compare this with the mutual fund inflows which on a monthly basis is more than Rs 50,000 crs. SIP inflows each month now are more than Rs 25,000 crs.
The total number of life insurance agents in India is 30,02,959. Of these LIC of India has almost 14.34 lakh agents whereas amongst the private life insurers, Hdfc Life has 250,000 agents and ICICI has around 216,000 agents

The general insurance industry has collected Rs 1.08 lakh crores of premium in FY 25 till date. Stand alone health insurers have collected Rs 14,829 crores compared to Rs 12,000 crores last year.

There are seven lakh general insurance agents in the country. Most of the life and general insurance agents may not be very active. The number of active life insurance agents is approximate 20-25%. Insurance is a very difficult product to sell since most people do not want to contemplate about their after life. More often than not, it is sold for the purposes of savings and tax planning rather than for pure protection purposes.

The National Pension System (NPS) is regulated by the Pension Fund Regulatory and Development Authority (PFRDA). PFRDA has facilitated the appointment of Retirement Advisers for providing advice on the NPS. A Retirement Adviser (RA) has to be a graduate in any discipline and has to clear the relevant NISM exam for the same. The person will get a license to act as an RA for a period of three years. The license can be extended by appearing for the same exam again or by attending a CPE course that is conducted by accredited service providers. RIAs under Sebi are not required to become RAs and they can advise on the NPS product. However, this exemption is not available to MFDs and life insurance agents. An RA can charge fees to the investors for opening of accounts, on their contributions and on the AUM. However, there are minimum and maximum amounts for each of this category of fees.

In order to distribute PMS products, distributors and advisors have to be registered with the Association of Portfolio Managers in India (APMI). Distributors have to pass the NISM Series XXI-A examination and then apply to APMI for registration. The license is valid for three years. For renewal of license, distributors need to clear the exam again or undergo a CPE session.

Sebi grants licenses to individuals, firms and companies to act as RIAs. RIAs (or the principal officers of a corporate RIA) are required to have a professional qualification, a post graduate degree, a CFA charter holder or pass the post graduation program in securities market offered by NISM. Further, an experience of at least five years in activities related to advice in financial products or securities or fund or asset or portfolio management is required. Also, the RIAs should have the relevant certification from NISM too.

RIAs are required to pass the two exams of NISM viz NISM X-A and X-B. Both exams are of 150 marks with a minimum 60% required to pass the exam with negative marking of 25%. The license is valid for three years. RIAs can advise their clients on most investment products and they can charge a fee from the clients. They can either charge a flat fee or an AUM based fee. Investors who consult RIAs generally invest in the direct plans of mutual funds, PMS and AIF schemes.
Sebi has now proposed to reduce the qualifications and experience requirements for new RIAs. This is expected to allow more people to get licensed as RIAs as currently there are only 1400 odd RIAs operating in India.

As can be seen from the above, there is no minimum educational qualification for distribution of mutual funds and PMS products. Insurance agents do have to pass their tenth standard exam whereas RAs have to be graduates. Only RIAs are required to have a post graduate qualification which is now being diluted and even graduates can become RIAs. All distributors have to mandatorily pass their product specific exam and then continuously update their knowledge either by passing the exam again or by attending a session where they can stay updated on the latest developments in their industry.

Accordingly, investors should ensure that they are dealing with qualified and licensed agents/ distributors/advisors before investing in any financial product. It is a better if the person is qualified to sell multiple products. Accordingly she will have the necessary knowledge and information about different products. One can verify the same by requesting the advisor to produce the license issued by the respective industry association. In addition to the NISM qualification, investors should check the general education qualifications of their advisors as well as their experience in financial markets. One should prefer to deal with advisors who have a post graduate qualification such as MBA (finance), CA, CFA, etc. They should also have been in the market for many years and accordingly have seen the market behaviour over different time periods.

One important differentiation is whether the advisor is selling a product to you or is building a financial plan for you and investing according to the plan. Good advisors will construct an asset allocation plan and then determine various investment vehicles which will suit the requirements of the investor. Clients should determine whether they are buying a product or buying a service. If they are buying a product, then they are taking the responsibility for their financial plan as the advisor has no knowledge about the financial objectives or other investments of the client. Clients should ideally look for an educated and experienced advisor who can guide them on investing in different products and will recommend products which will fit the plan of the client. They should also do some background check on the advisor. Determine whether they are doing financial products on a full time or part time basis. Advisors focussing solely on financial markets should have better understanding of the products as well as be able to provide better service. Do they have the necessary software to provide you regular updates on the value of your portfolio as well as the gains/losses compared to the relevant benchmarks. The number of clients and the assets managed by them will also help determine the ability of the advisor.

To conclude, investors should do a thorough check on their advisor before choosing to deal with them. The first thing is to deal with registered/licensed advisors and then check on their qualifications, experience and infrastructure before moving ahead.