Mutual Fund Distributor vs. Registered Investment Advisor: Which one Should an Investor Choose?
While choosing a mutual fund scheme for investment, an individual can choose one of these three options: Do your research and select the fund, seek the assistance of a mutual fund distributor (MFD), or seek the assistance of a registered investment advisor (RIA). Most investors don't have the time and knowledge to go for the first option. So, they are left with seeking the assistance of an MFD or an RIA. This blog focuses on mutual fund distributor vs. registered investment advisor: Which one should an investor choose?
Before we discuss which one an investor should choose between, an MFD or RIA, let us understand their roles.
Mutual Fund Distributor (MFD)
A mutual fund distributor or MFD helps investors buy and sell mutual fund schemes. An MFD may be tied to a single mutual fund house or tie-up with multiple mutual fund houses. They earn a commission on the mutual fund schemes sold by them to investors. They are paid a trail commission for the sales made. There is no upfront commission paid to MFDs. An MFD facilitates:
- Purchase of a mutual fund scheme in lumpsum
- Registration of systematic investment plan (SIP)
- Switching between schemes (systematic transfer plan or STP)
- Redemption of a mutual fund scheme in lumpsum
- Registration of a systematic withdrawal plan (SWP)
Any other services related to the above
To become an MFD, one must clear the NISM Series V-A: Mutual Fund Distributors Certification. After clearing the certification, an ARN (AMFI Registration Number) must be procured from AMFI. Suppose the MFD is a bank, broker, or some other organisation. In that case, the employees involved in the sales of mutual fund schemes have to procure an Employee Unique Identification Number (EUIN) from AMFI.
Now that we know about MFDs let us understand who an RIA is and their role.
Registered Investment Advisor (RIA)
A Registered Investment Advisor (RIA) helps individuals by providing them with investment advice. An RIA can be an individual or an organisation. RIAs usually provide comprehensive financial planning solutions to their clients by:
- Helping identify financial goals and quantify them
- Doing risk profiling to understand whether the client has a conservative, moderate, or aggressive risk profile
- Recommend appropriate asset allocation based on the client’s risk profile
- Recommend appropriate mutual fund schemes and other financial products based on the client’s financial goals, risk profile, and asset allocation.
- Review the recommended financial products regularly and suggest changes wherever required
An RIA charges a fee to the client. It can be a flat fee or a percentage of assets under management (AUM). The fee is agreed upon by mutual consent between the RIA and the client. The mutual fund house does not pay the RIA any commission.
Apart from mutual fund recommendations, an RIA may help the client with other aspects of financial planning such as:
- Building and maintaining an emergency fund
- Term insurance for family bread earners, health insurance for all family members, general insurance for assets like a vehicle, home, etc.
- Tax planning
- Estate planning, etc.
An RIA has to meet the eligibility criteria set by SEBI. If they are eligible, they have to clear the requisite NISM certification. After clearing the NISM certification, the RIA has to register with SEBI. Once SEBI approves, the RIA can start offering advisory services to investors.
Mutual Fund Distributor Vs Registered Investment Advisor
We have understood the role of an MFD and an RIA. Now let us do a comparison of the two on certain parameters.
|Parameter||Mutual Fund Distributor (MFD)||Registered Investment Advisor (RIA)|
|Services offered||An MFD facilitates buying and selling of mutual fund schemes.||An RIA can provide comprehensive financial planning services and recommend investment products including mutual fund schemes.|
|Tie-up||An MFD has a tie-up with a single fund house or multiple fund houses. They recommend the schemes of fund house/s with whom they have a tie-up. Hence, there can be a conflict of interest.||An RIA doesn't have a tie-up with any mutual fund house. Hence, they recommend mutual fund schemes best suited to a client's needs.|
|Remuneration||An MFD gets remunerated by the mutual fund house in the form of a trail commission on the sale of mutual fund schemes.||An RIA charges a fee to the client in the form of a percentage of assets under management (AUM) or a flat fee.|
|Registered with||An MFD is registered with AMFI with an ARN.||An RIA is registered with SEBI.|
|Schemes recommended (direct or regular)||An MFD will recommend investment in regular mutual fund schemes. The expense ratio of these schemes is higher than direct schemes because the MFD’s commission is paid from the expense ratio.||An RIA will recommend investment in direct mutual fund schemes. The expense ratio of these schemes is lower than regular schemes because there is no MFD commission involved.|
Choosing Between an MFD and an RIA
When it comes to choosing between an MFD and an RIA, you need to bear in mind that an MFD's bouquet of mutual fund scheme offerings may be limited if they have a tie-up with a single AMC or limited AMCs. In that case, they will recommend mutual fund schemes of only those AMCs with whom they have a tie-up. It may or may not be in your best interests as a client.
An MFD will always recommend investing in a regular plan. The expense ratio of these plans is higher as it includes the MFD’s trail commission. So, even if you are not paying the MFD directly from your pocket, you are funding their trail commission indirectly by paying a higher expense ratio in a regular plan.
A Registered Investment Advisor (RIA) has a far bigger bouquet of mutual fund scheme offerings as they don't have to tie-up with any AMC. So, they can recommend any scheme of any AMC based on your needs. Hence, there is no conflict of interest for RIA's as they don't get paid any trail commissions from AMCs like MFDs.
A well-qualified, knowledgeable, and experienced RIA can help you with comprehensive financial planning. It can help you meet all your requirements beyond mutual funds like building and maintaining an emergency fund, insurance, tax planning, estate planning, etc.
Things to Keep in Mind when Choosing an MFD or RIA
Irrespective of whether you plan to choose an MFD or an RIA, keep the following things in mind:
- Make sure the MFD or RIA has adequate experience in handling clients
- Ask for references of clients that they have helped achieve their financial goals. Please speak to a couple of clients to understand their experience when working with the MFD or RIA.
- Finally, choose an MFD or RIA who is willing to handhold, educate and empower you.
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