India’s financial market has seen tremendous changes over the last two decades. Now, investors have access to various financial instruments like equities, mutual funds, bonds, commodities, exchange-traded funds, and alternative investments. Although various financial instruments create tremendous wealth-building opportunities for investors, it makes the investment process more complicated for investors, especially new investors.

Investors face difficulties in making decisions like which financial instrument to select for investments and how to manage investments effectively. Hence, financial professionals play a vital role in helping investors make better financial decisions.

In the financial services industry, various terms like financial advisors, wealth managers, brokers, and distributors create more difficulties for investors in making better financial decisions. Among all financial professionals, two types of professionals investors commonly face in India’s financial markets are financial advisors and mutual fund distributors. Although mutual fund distributors and financial advisors help investors in making better financial decisions, their responsibilities and tasks differ significantly.

In this guide, we will discuss the differences between financial advisors and mutual fund distributors to help Indian investors select better financial professionals for making better financial decisions.

Understanding the Role of Financial Intermediaries in India

Financial intermediaries essentially serve as a bridge between investors and financial products. They assist people in grasping the market and making sound financial decisions.

In India, financial advisory and distribution services are governed by the capital markets regulator, the Securities and Exchange Board of India (SEBI). Under this framework, two prominent professionals dominate the financial investment arena:

• Mutual Fund Distributors (MFDs)
• Financial Advisors

Each of these professionals plays an important role in the financial services industry.

Who is a Mutual Fund Distributor?

A Mutual Fund Distributor (MFD), on the other hand, is an individual or an entity that assists investors in buying and selling mutual fund schemes. The major responsibility of a distributor is to provide mutual fund products and facilitate transactions.

Mutual fund distributors are registered with the Association of Mutual Funds in India (AMFI), which is responsible for regulating and monitoring mutual fund distribution. Services provided by mutual fund distributors are mainly related to investing in mutual fund schemes.

Key Functions of a Mutual Fund Distributor

The role of the mutual fund distributor includes the following important tasks in the process of investment.

1. Explaining Mutual Fund Concepts- The role of the distributor is to explain the basic concepts of mutual funds to the investor, which include the types of mutual funds, such as equity funds, debt funds, hybrid funds, and index funds.

2. Recommending Mutual Fund Schemes- The distributor may recommend the best mutual fund schemes to the investor on the basis of their financial objectives and risk capacity.

3. Facilitating Transactions- The distributor helps the investor in the transaction process, which includes buying, selling, and starting the Systematic Investment Plans (SIPs) of the mutual funds.

4. Providing Administrative Support- Distributors help with account opening, documentation, portfolio statements, and operational support.

How Do Mutual Fund Distributors Earn?

Distributors are compensated through commissions received from Asset Management Companies (AMCs). These commissions are part of the expense ratio of the mutual fund scheme. There are usually two types of commissions:

Upfront Commission

This is the commission received at the time of investing in the mutual fund.

Trail Commission

This is the commission received on an annual basis, depending on the amount invested.

Since their remuneration is linked to sales, there is sometimes the potential for conflict.

Who is a Financial Advisor?

A financial advisor offers personal financial advice to investors in relation to investment strategies and long-term financial planning.

Unlike distributors, financial advisors are more focused on advisory services and not on selling products.

The aim of financial advisors is to assist clients in creating investment strategies that meet their long-term financial objectives, for instance, retirement planning, wealth creation, and education planning.

Financial advisors in India must register with the Securities and Exchange Board of India under the Registered Investment Advisor (RIA) regulations.

Key Functions of a Financial Advisor

Financial advisors offer more services compared to distributors.

1. Financial Goal Assessment- They start with analyzing the client’s financial goals, which may include retirement planning, education planning for children, wealth creation, or planning for property acquisition.

2. Risk Profiling- They assess the client’s capacity to bear risk and their financial strength before making any investment.

3. Asset Allocation Planning- They create portfolios of investments that may include stocks, mutual funds, bonds, ETFs, REITs, and many more.

4. Portfolio Monitoring and Review- They continuously monitor the performance of investments and may adjust investments if required.

5. Long-Term Financial Strategy- They may assist clients with tax and estate planning and wealth creation.

How Do Financial Advisors Earn?

They follow a fee-based model of compensation.

They do not get any commission for selling financial products; instead, they charge clients for advisory services.

The fee structures may vary as follows:

• Annual advisory fee
• Percentage of assets under advice (AUA)
• Hourly consultation fee
• One-time financial planning fee

Since financial advisors do not rely on selling financial products for their income, it is assumed that they will give unbiased advice.

Key Differences Between Financial Advisors and Mutual Fund Distributors

Duties of Mutual Fund Distributors and Financial Advisors

This will give us further clarity.

Duties of a Mutual Fund Distributor

Typical duties of a mutual fund distributor include:

• Explaining various mutual fund schemes
• Suggesting mutual funds to investors
• Facilitating mutual fund investments and redemptions
• Providing mutual fund scheme documents
• Assisting in registering and updating SIPs

The services offered by mutual fund distributors primarily relate to mutual fund investments.

Duties of a Financial Advisor

Broad financial planning activities include:

• Conducting detailed financial assessments
• Evaluating income, expenditure, liabilities, and investment objectives
• Providing advice on the need for diversified portfolios
• Developing asset allocation strategies
• Monitoring and rebalancing the portfolios

The role of financial advisors extends beyond transactional activities to include financial planning.

Direct Plan vs Regular Plan in Mutual Funds

Another significant concept associated with distributors/advisors is that of a direct/regular mutual fund plan.

Direct Plan

In a direct plan, mutual funds are bought directly from the asset management company.

The expense ratio is lower in a direct plan because there are no distributor commission charges.

Regular Plan

In a regular mutual fund plan, investments are made with the help of intermediaries like distributors/brokers.

The expense ratio is slightly higher in a regular mutual fund plan because of distributor commission charges.

Qualification and Certification Requirements

Financial experts need to comply with specific certification criteria to practice in India.

Certification for Mutual Fund Distributors

To be a mutual fund distributor, one is required to successfully complete the NISM Series V-A: Mutual Fund Distributors Certification Examination under the auspices of National Institute of Securities Markets.

Upon completion of the exam, one is then required to register with Association of Mutual Funds in India and obtain an ARN (AMFI Registration Number).

Certification for Financial Advisors

Investment advisors must comply with more stringent regulatory requirements and pass two certification tests:

• NISM Series X-A: Investment Advisor Level 1
• NISM Series X-B: Investment Advisor Level 2

The tests include financial planning, building portfolios, risk management, regulatory compliance, and client advisory.

Regulatory Measures to Protect Investors

The Securities and Exchange Board of India has initiated several steps to enhance transparency and safeguard investors.

Preventing Mis-selling

Mis-selling refers to the practice of selling financial products mainly for the purpose of earning commissions, instead of meeting the requirements of the investors.

In this context, the SEBI has undertaken the following steps:

• Restricting upfront commissions
• Encouraging the use of trail-based commissions
• Enhancing transparency in expense ratios
• Encouraging fee-based models

Clear Role Distinction

The SEBI has clearly stated its stand on the role of distributors, which cannot be presented as financial advisors unless they are registered as investment advisors.

Which Professional Should You Choose?

The decision between a mutual fund distributor and a financial advisor rests in your financial needs.

When a Mutual Fund Distributor May Be Suitable

A mutual fund distributor may be more suitable for you if:

• You wish to invest only in mutual funds
• You are a beginner and wish to start investing in mutual funds through a systematic investment plan
• You wish to be assisted with documentation and transactions

When a Financial Advisor May Be Better

A financial advisor may be more suitable for you if:

• You wish to create a financial plan for the future
• You wish to be advised on various asset classes
• You wish to receive unbiased investment advice
• You wish to create a financial plan for your life

Conclusion

Although both financial advisors and mutual fund distributors are significant contributors to India’s investment arena, their areas of expertise are directed towards fulfilling different investment requirements. A mutual fund distributor is essentially a person who assists mutual fund investors in mutual fund transactions and provides advice regarding mutual fund investments. A financial advisor, however, is a person who provides financial advice to mutual fund investors and assists them in creating a long-term investment plan according to their financial goals and objectives.

If you are a beginner and wish to start investing in mutual fund schemes, especially in SIPs, then a mutual fund distributor would certainly be of help to you. But if you are looking to create a long-term investment plan that not only covers mutual fund investments but also covers a number of other investment instruments, then a financial advisor would certainly be of greater help to you.

Therefore, it is important to understand that it is not necessarily a matter of choosing between a financial advisor and a mutual fund distributor, but it is a matter of what you wish to achieve and how you wish to be involved in the process of wealth creation.