Limit RIA fees to 3% of household budget

NO FREE LUNCH

- AVINASH LUTHRIA

Only around three dozen Securities and Exchange Board of India (Sebi)-registered investment advisors (RIAs), i.e., financial planners, charge a fixed fee.

The rest charge a percentage of the assets under advice (AUA).

Depending on an RIA's experience, academic qualifications, and the number of hours of effort put in (by a fixed-fee RIA), the highest-fee RIA in India can charge 10 times the lowest-fee RIA.

An important decision a client must make is the appropriate level of fee they should pay an RIA.

In my view, the appropriate amount a client should spend on average annual fees over the first five years of engagement should be around 3 per cent of the client's annual household budget.

This rule of thumb refers only to the client's budget and not to the RIA's fee structure.

Let us see how this works using an illustration.