What Is the Difference Between Mutual Fund Distributor and Investment Advisor

Overview

The world of finance is riddled with similar-sounding job descriptions for service providers. Financial adviser, wealth manager, mutual fund distributor, broker, agent, investment advisor - a layman may be easily confused by all these terms.

But if you intend to become an investor, it is important that you familiarise yourself with these professions and understand the difference between each profile. Here, we will discuss the difference between a mutual fund distributor and an investment consultant.

What is a mutual fund distributor?

A person or group that facilitates the purchase and sale of mutual funds, and earns a commission for the sale of each scheme, is called a mutual funds distributor. These distributors assist you in making investment decisions by offering the scheme best suited to your needs after an assessment of your assets.

Who is an investment advisor?

Unlike mutual fund distributors, the services provided by investment consultants extend to other finance and investment advice. Investment advisors can be individuals or groups who evaluate your assets, income, expenses and liabilities and help you plan your investments accordingly for a fee.

Duties of mutual fund distributors and investment advisors

Mutual funds financial advisors must explain to investors the benefits of mutual funds, their different types, and risks. Then, they present them with options of schemes that best fulfil investors' needs and help them find the perfect mutual fund investment. Once the right choice has been made, the chief responsibility of mutual fund distributors is to provide the plan and its benefits to investors.

Meanwhile, the job of investment advisors is to help you manage your finances, assets and investments in a way that delivers optimum gains. They can advise you in all investment matters, whether stocks, commodities, mutual funds or others. Investment advisors manage investor portfolio, record-keeping, evaluating risk-taking capacity and choosing the right investment options. The key difference is that investment advisors do not provide you with any investment schemes.

Direct plan vs regular plan

A mutual funds plan bought directly from a distributor is a called direct plan, whereas a regular plan is bought through a broker, advisor or other intermediaries. When you are dealing with a mutual fund distributor, you will buy a direct plan from them. Conversely, if your investment advisor recommends that you invest in a mutual plan, it will be a regular plan.

Qualifications and certificates

Mutual funds distributors are regulated by the Association of Mutual Funds in India (AMFI) and investment advisors under the Securities and Exchange Board of India (SEBI).

To become a mutual fund distributor, one must qualify for the National Institute of Securities Market (NISM) Series V-A: Mutual Fund Distributors Certification Examination. An investment advisor, on the other hand, must clear the NISM Series X-A: Investment Advisor- Level 1 and NISM Series X-B: Investment Advisor- Level 2 exams.

Regulatory actions

Here are some regulatory actions taken by SEBI to check malpractice and establish a difference between mutual fund advisory services and investment advisors:

  • Distributors may often indulge in "mis-selling" of mutual fund products. This refers to the sale of a mutual fund scheme that is not suitable to an investor simply for earning a commission. In order to check this malpractice, asset management companies (AMCs) have been instructed by SEBI to pay only trailing commissions to distributors.

  • Traditionally, a trailing commission is a fee paid to advisors each year that you have an investment in your possession. In doing so, SEBI aims to increase the number of registered investment advisors (who earn fees for their services) in comparison to distributors (who make commissions).

  • Meanwhile, in order to clear any confusion regarding the roles of advisors and distributors, SEBI has also asked distributors to refrain from identifying themselves as "wealth advisors" or "independent financial advisors" unless they are registered investment advisors.

As mentioned earlier, mutual funds financial advisors are likely to mis-sell products solely to earn commissions. RIAs, on the other hand, work for a fee and are under no pressure to make a larger quantity of sales. This enables them to advise you according to your own needs. Moreover, investment advisors are regulated by the SEBI RIA Regulations, 2013. Ideally, you should first consult with an investment advisor before approaching a distributor for a mutual fund product.

Conclusion

Mutual fund distributors are likely to discuss the provisions of their products with you with the intention of selling them. Investment advisors, on the other hand, will discuss your income, expenses, long- and short-term goals, tax obligations and income to tailor your investment plan in an unbiased manner.

As far as the risk factor is concerned, investment advisors will discuss your capacity for it and scrutinise your mutual fund scheme performance over the years. Meanwhile, mutual fund distributors will primarily be concerned with meeting their own financial needs.

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