Every financial adviser in India is paid in one of two ways. Either the client pays a fee, or the product manufacturer pays a commission. The first model is the SEBI-registered investment adviser, who may charge you directly and is barred from earning on the products recommended. The second is the AMFI-registered mutual fund distributor, who charges you nothing visible and is paid a trail out of the fund’s expense ratio for as long as you stay invested. Neither model is dishonest. But they create different incentives, and the regulator has spent a decade building walls between them.
This is a neutral explainer of the two models as they stand in August 2026. It does not describe any particular firm, including ours; it describes the rules, so that you can ask any adviser the right questions.
What is the difference between a SEBI RIA and a mutual fund distributor?
A registered investment adviser (RIA, or IA in SEBI’s language) is licensed under the SEBI (Investment Advisers) Regulations, 2013, most recently consolidated in November 2025 (SEBI, regulations as amended). The IA owes the client a fiduciary-style duty: advice must follow risk profiling and suitability, and the adviser is paid by the client alone.
A mutual fund distributor (MFD) holds an AMFI Registration Number and sells fund units. Distributors are exempt from IA registration only for advice that is incidental to distribution; a distributor who advises across securities generally must register as an IA (SEBI IA FAQ; confirm the current scope with SEBI). AMFI’s code requires MFDs to disclose “all commissions … received or receivable by them for the different competing schemes” they recommend (AMFI master circular for MFDs, January 2026).
The labels overlap in practice. Some firms hold both registrations in separate entities. Some individuals call themselves “wealth managers” or “financial planners” while operating under one or the other licence. The label on the door tells you less than the registration number and the fee agreement.
How does a fee-only adviser get paid in India?
“Fee-only” is not a SEBI term, but the concept maps closely to what the IA regulations require: the adviser’s remuneration comes from the client and not from the product. SEBI caps what an IA may charge individual and HUF clients under two modes. Under the assets-under-advice mode, the fee cannot exceed 2.5% of AUA per annum per family of clients across all services. Under the fixed-fee mode, the cap is ₹1,51,000 per annum per family, revised from ₹1,25,000, with the adviser free to switch a client between modes (SEBI guidelines for investment advisers, January 2025). The caps do not apply to non-individual clients or accredited investors.
The separation is structural, not just a promise. SEBI’s board memorandum behind the December 2024 amendments states that “an individual IA is not allowed to provide distribution services”, that the IA’s family cannot distribute to the IA’s advisory clients, and that a non-individual IA must segregate advisory and distribution at group level, offering any one client only one of the two (SEBI board memorandum, October 2024; amendment notification, December 2024). The regulator’s stated rationale is the conflict itself: under the distribution model “IAs are paid by the producers/issuers”, which “compromises on the unbiased and independent advice”.
How does a commission-based distributor get paid?
A distributor earns a trail commission: a percentage of your invested assets, accrued daily and paid monthly by the fund house from the scheme’s expense ratio. Since SEBI’s October 2018 circular, funds must use “the full trail model of commission in all schemes” with no upfront payments, and all commissions must be “paid from the scheme only” rather than from the AMC’s own books (SEBI circular, October 2018).
This is why every scheme has two plans. The regular plan carries the trail; the direct plan does not and has a lower expense ratio. AMFI’s master circular records SEBI’s position that “MFDs cannot deal in Direct Plans” and requires any distributor platform to state plainly that the investor is buying a regular plan “which involves payment of commission to MFD”, with a link to the commission rates (AMFI master circular, January 2026).
The trail model has genuine merits. It aligns the distributor with your staying invested, not with churning; it removes the upfront-commission incentive that once drove mis-selling; and it lets investors with small sums get hand-holding they would never pay a fixed fee for. The cost is that the fee is invisible, proportional to assets, and paid for as long as the units exist, whether or not advice is still being given.
A worked illustration
Consider a family with ₹1 crore in equity funds, for illustration only. In a regular plan whose expense ratio is, say, 0.8 percentage points higher than the direct plan, the distributor’s trail is roughly ₹80,000 a year, embedded in the NAV and never invoiced. Over ten years, ignoring growth, that is ₹8 lakh; with growth, more, because the fee scales with the portfolio.
The same family engaging an IA on the fixed-fee mode pays at most ₹1,51,000 a year under the current cap, invoiced, and holds direct plans. On the AUA mode they might pay, say, 1% — ₹1 lakh — with the fee rising and falling with assets. Which is cheaper depends on portfolio size, the actual rates agreed, and whether advice is really being consumed. At ₹20 lakh the trail may be far cheaper than any fixed fee; at ₹5 crore the arithmetic reverses. The figures here are hypothetical and no adviser’s actual pricing is implied.
Which conflicts of interest should you watch for?
Each model has a characteristic blind spot. For a distributor, the incentive is toward products that pay trail — regular plans, and among them, schemes and categories with higher expense ratios — and away from those that pay none: direct plans, most index funds, government bonds, deposits, or the advice to hold cash and do nothing. For a fee-based adviser on the AUA mode, the incentive is toward keeping assets under advice, which can quietly argue against paying down a loan, buying a home, or moving money to a goal the adviser does not oversee. Fixed fees avoid that but can under-serve very large portfolios or over-charge small ones.
Neither incentive makes an individual dishonest. It makes them human. The useful stance is not suspicion but transparency: know how the person across the table is paid and read their advice with that in view. It is the same reason a portfolio benefits from written rules, a theme our note on what AI cannot do in investing touches from a different angle — judgement is valuable precisely when it is accountable.
Questions to ask any adviser before you sign
- Which registration do you hold? Ask for the SEBI IA registration number or the AMFI ARN, and check it on the regulator’s website.
- How exactly are you paid on my money? A fee I invoice, a trail from the fund, or both — and if both, through which entities and for which clients.
- Will I hold direct or regular plans? The answer follows from the model and is the fastest check on it.
- What is my total cost of ownership, in rupees, in a flat year? Fee plus expense ratio plus any platform or execution charges.
- What do you not advise on, and why? The honest answer maps the adviser’s blind spots for you.
- What happens if I want to leave? Notice periods, exit charges and how assets transfer.
A written fee agreement is mandatory for an IA and a good sign from anyone. Read it before the pitch, not after.
What the fee model does not settle
A clean fee model is a necessary condition for good advice, not a sufficient one. A fee-only planner can still build a poor portfolio; a commission-paid distributor can still put a client in sensible funds and keep them there through a crash, which is worth more than most people credit. What the model settles is whose interests are structurally aligned with yours, and how visibly.
Once that is clear, the real work is the same under either model: deciding the mix, sizing each holding, and staying the course. The mix comes first — see why asset allocation is the only free lunch — and it should be anchored to what the money is actually for, which is the argument of the purpose of wealth is freedom, not numbers. An adviser who starts there, and tells you plainly how they are paid, has already answered the most important question.
