Buying shares in mutual funds has become a prevalent approach for investing to broaden one’s financial goals over time. The mutual funds market is characterised by its ambivalence, with different kinds of funds like large cap, mid cap and small cap mutual funds, which have their own set of benefits and risks. This is where many investors prefer to hire advisors. But when it comes down to searching for help, should you choose a broker or a financial adviser instead? Despite both being very important in the investment process, they tend to have different interrelations, services and responsibilities. In this blog, we will discuss the difference between a financial advisor and a mutual fund distributor and help you understand which service is appropriate for your investment.
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Role of a Mutual Fund Distributor
A mutual fund distributor is an agent or organisation that has been granted the authority to market mutual funds to investors. Their main aim is to assist their clients in executing buy or sell transactions of mutual funds. These distributors provide access to several mutual fund schemes that include the large cap mutual fund that invests in blue chip companies and small cap and mid cap mutual funds that invest in small high growth, i.e., emerging companies.
Yet, whilst mutual fund distributors may provide access to various investment vehicles, they are not investment advisers in any sense of the word. They will assist with opening accounts, completing paperwork and so on, and will ensure that the investment is completed. However, they do not normally offer strategy services, nor do they address the complete picture of an investor’s finances. The distributor earns commissions from the mutual fund companies for selling their products, and these commissions are often built into the mutual fund.
Role of a Financial Advisor
On the other hand, a financial advisor is a professional who provides personalised financial advice, considering an investor’s entire financial situation, including goals, risk tolerance, time horizon, and more. A financial advisor does not focus solely on mutual funds but instead offers a comprehensive approach to financial management. They might suggest mutual funds, such as large cap, mid cap, or small cap mutual funds, as part of a broader portfolio strategy, but they are not limited to these products.
Financial advisors typically follow a fee-based model, where they charge a percentage of the assets they manage or an hourly consulting fee. This can reduce potential conflicts of interest, as their compensation is not tied to the specific products they recommend. Their primary duty is to act in the best interest of the client, adhering to a fiduciary standard, which means they are legally bound to prioritise their client’s financial well-being.
In addition to recommending investment products, financial advisors can assist with retirement planning, tax strategies, estate planning, and overall financial health. This makes their role more comprehensive than that of a mutual fund advisor.
Key Differences Between a Mutual Fund Distributor and a Financial Advisor
It is crucial to differentiate the functions of a mutual fund distributor and a financial advisor for the effective management of your investments. Below are outlined the fundamental distinctions:
1. Scope of Services
The critical aspect that sets apart the financial advisor from the mutual fund distributor is the area of services provided. The function of a mutual fund distributor is almost always operational—they promote and sell various elements of fund packages, mutual units, large as well as small and medium funds.
On the other hand, a financial advisor provides a comprehensive service, offering holistic advice that encompasses all aspects of an investor’s financial life. This includes tax planning, estate planning, and retirement strategies in addition to investment advice.
2. Compensation Model
In most cases, mutual fund distributors are paid through commissions structured by the mutual fund companies that outsource their services. More often financial consultants charge on an hourly basis or take a fee that is a fraction of the assets under management. This is important because it creates room for differences in the subsequent advice.
A financial advisor owes a duty to the client and cannot be concerned about the expectations of a third party. This is not the case for a distributor who may push products that pay higher commissions even when those products are not in the best interest of the client.
3. Obligation and Fiduciary Duty
Typically, financial advisors are fiduciaries. They have a legal requirement to put their clients’ interests before their own. This translates to being impartial and giving only recommendations that resonate with the long-term financial objectives of the client.
There is no such requirement for mutual fund distributors. Their focus is more on selling mutual funds rather than offering personalised advice, and this might create a conflict of interest, especially if they recommend funds that offer higher commissions.
4. Customisation and Personalisation
Financial advisors tailor their services to the unique needs of each client, developing customised strategies that take into account factors such as risk tolerance, time horizon, and specific financial objectives. They will recommend investment products like large cap mutual funds and mid- and small cap mutual funds as part of a broader strategy designed for each client.
Conversely, mutual fund distributors may not offer this level of personalisation. They are more focused on presenting available mutual fund options without conducting a thorough financial analysis.
5. Long-Term Relationship
Clients’ relationships with financial advisors tend to be longitudinal as these professionals will always provide their clients with guidance even as their clients’ investment strategies and life situations change.
In contrast, one may interact with a mutual fund distributor mainly before and after investments are made, as the relationship is mostly transactional. This indicates that an investor in need of constant advice regarding their portfolio and changes to it could be better off with a financial advisor.
To sum up, when comparing a financial consultant with a mutual fund distributor, the investors’ requirements and objectives must come into play. A mutual fund distributor is more appropriate for individuals who already have an investment plan and, therefore, need someone to assist them in buying and selling those mutual funds only. If you’re looking for a more hands-off approach and need support in executing your mutual fund investments, Share India can be a suitable choice as a mutual fund distributor.
In contrast, a financial consultant is acceptable for clients who want a more detailed investment plan which includes areas beyond mutual funds. For more financial advice, you can always reach out to us at Share India!
Both positions serve an important role in enabling people to cope with the financial markets. However, one needs to determine how much advice and service one wants before making a choice. It is best to know one’s needs and speak to professionals when needing assistance in formulating a plan on how to manage one’s finances.
