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When it comes to differentiating between the two, it is quite difficult to do so as both help in making investment decisions. This also includes choosing MF schemes. Both are enrolled entities and managed by different regulatory bodies. As the Mutual Fund Distributor is owned and regulated by AMFI (The Association of Mutual Funds in India). And investment advisors are regulated by SEBI (Securities and Exchange Board of India).
Before moving ahead let’s understand a difference let’s discuss who are Mutual Fund Distributors and Investment Advisors?
Investment Advisor – An investment advisor is a person or group that provides financing and investment advice. Also administers securities analysis for a fee, whether through direct administration of client assets or through written publications. If it has sufficient assets to be enrolled with the SEC, it is recognized as a Registered Investment Advisor, or RIA. Investment advisors are also known as “financial advisors”. He evaluates the assets, liabilities, income and expenditure of the investor and advises the investment plan.
Mutual Fund Distributors – They are individuals or entities that facilitate the purchase and sale of MF units to investors. They earn income in the form of commission for bringing leads (investors) to invest in MF schemes. They are expected to know the investor’s position, risk profile and suggest a suitable investment plan to meet the demands of the investor.
Earning commission does not mean that the Mutual Fund distributor is allowed to trade the MF scheme to the investors just for getting commission. Well, the rules are very strict in this regard.
Now let us discuss the 8 points which help to differentiate between Mutual Fund Distributor and Investment Advisor.
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Payment Mode for Consultancy
We all know that Mutual Fund Distributors are enrolled with AMFI, they are generally the executors of your investments. Investor asks Mutual Fund Distributor to buy/sell MF plans for him. By doing this the AMC pays commission to the MFD. SEBI directs AMCs to avoid mis-selling of MF schemes. Paying only trail commission using the trail-only model. Further, no advance commission or upfronting of any trail commission is to be paid either directly or second hand. Even contests or sponsorships would be recognized as an advance payment. These investment advisors generally charge a fee instead of taking commission from the AMC. So with this change in industry investors.
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depository duty
Distributors differ from advisors in the sense that advisors are bound by depository duties. This implies that they are committed to providing honest advice to investors, whereas distributors are not bound by any such promise.
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Examination and Certification
The exam pattern is different for both Mutual Fund Distributor and Investment Advisor. Get valid certification by National Institute of Securities Market (NISM) for MFD. By passing their certification exam NISM Series VA: Mutual Fund Distributors Certification Exam. For Investment Advisor a person needs to qualify 2 levels both of which are:
- NISM-Series-XA: Investment Advisor-Level 1
- NISM-Series-XB: Investment Advisor-Level 2
Mutual fund advisor should have a certificate in financial planning.
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Advisors can give advice but not distribute
An MFD has a plus point that they can advise for the best MF schemes. They help an investor understand the benefits of mutual funds, types of MFs and risk factors. They also guide the investor regarding mutual fund investments and cater to the demands of the investors. After this, they ask the investor to invest money in mutual funds. They keep distributing the plans of mutual funds. Investment advisors advise which mutual funds to invest in but cannot act as distributors. His job is only to give advice. After that its investors choice but distributors make sure that the investor invests in mutual funds.
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distinction of duty
Moreover, the main focus of a mutual fund distributor is the distribution of funds. While the job of an MF, advisor involves many other duties.
- Helping an investor transform his portfolio
- record keeping
- Risk appetite assessment of the fund
- Choosing the Right Investment Option
Direct Plan Vs Regular Plan
A mutual fund distributor will give the regular scheme to the investor and ask him to invest in it. But investment advisors recommend investors to invest in direct plans. In the past MFs had to be bought under the guidance of distributors, there was no separate option. But in January 2013, SEBI ordered AMCs to start direct scheme of mutual funds. This enables advisors to not only advise investors but also assist them in investing in direct MF schemes. Direct plans have a more economical expense ratio as compared to regular plans. So while distributors may lure you towards regular plans for their commission, consultants will not.
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Underline that their level of gathering relevant information varies
Recognizing the need to have a general understanding of your financial profile is the foundation of good financial planning. As a result it is essential to guarantee that the person you are trusting with finances is interested in asking important questions. Like about your goals, income, expenditure, long and short term goals, assets, liabilities, tax status etc. They should also offer need-based plans to reach your financial goals rather than product-based advice. While there is a possibility to discuss your demands with MFD’s products, they are commissioned to market. A financial advisor is expected to provide unbiased advice tailored to meet your needs.
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Discussing risk and return factors
This factor is usually discussed in a brighter way by the advisor than by the investment advisor. He/she will discuss the risk factors for MF i.e. high, low, medium etc. Then he would look at the performance of the MF scheme over the years. It will then suggest you invest in the scheme. The investment advisor will ask the distributor to facilitate the investor to invest in the scheme specific mutual fund scheme that they are looking to meet their financial requirement only. An advisor would be more interested in evaluating your risk appetite. Also, setting reasonable expectations with concerns about return on investment.
conclusion
It is very difficult to say whether a mutual fund distributor is necessary or an advisor. Both are an important source for the right investment in mutual funds. From the point of view of Mutual Fund regulation- All individuals including companies, who get AMFI Certification Number (ARN) are Mutual Fund Distributors, from highest to lowest. They also require advice in a number of ways – scheme selection, asset allocation, tax planning etc., all within the ambit of MF schemes, in the way different AMC’s deliver MF schemes. So it is all up to the investor’s choice whether he wants to directly approach a distributor or seek advice for mutual funds.
‘Invest Today – Enjoy Tomorrow’!
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