Commissions Trump Advisory Fees in India's Booming Wealth Management Sector
India's wealth management business is experiencing rapid growth. Rising affluence, strong economic expansion, increased foreign investment, and a thriving startup ecosystem are fueling this surge. Despite this potential, the industry clings to an old model. It prefers lucrative commissions over transparent advisory fees.
This preference persists even a full decade after the Securities and Exchange Board of India (Sebi) introduced formal regulations for investment advisors. Those 2013 rules established a fee-based advisory model. Clients would pay a fixed fee directly to their wealth manager for unbiased financial advice.
The Stubborn Dominance of the Commission Model
The transition to fee-based advice has largely stalled. Industry executives point to two major roadblocks. First, compliance costs for advisory services are significantly higher. Second, many Indian investors remain reluctant to pay fees directly out of their own pockets.
This resistance is clear when examining India's top listed wealth managers. Nuvama Private Wealth derives a minuscule portion of its revenue from advisory services. Anand Rathi Wealth does not even offer a formal advisory service to its clients. For 360 One Wealth Management, commission-based distribution revenue continues to grow at a much faster rate than its advisory income.
The core issue is a conflict of interest. Under the dominant distribution model, the wealth manager earns a commission from the product manufacturer, like an asset management company, for selling a specific fund or scheme. This creates a natural incentive to recommend products that pay higher commissions, not necessarily those best suited for the client.
Why Commissions Remain More Lucrative
The financial arithmetic strongly favors commissions. Consider a relationship manager with a client portfolio worth ₹100 crore. A typical distributor commission can be up to 1% of the assets under management (AUM). In contrast, a fixed advisory fee usually ranges between 20 to 30 basis points (0.2% to 0.3%).
The choice for the wealth manager is stark. They could earn ₹1 crore through commissions or only ₹20-30 lakh via advisory fees. This substantial earnings gap explains the industry's deep-rooted preference for the commission-based system.
Feroze Azeez, Joint CEO of Anand Rathi Wealth, highlights another critical factor. He estimates that 15-20% of revenue in an advisory model gets consumed by regulatory compliance costs. These costs are far lower in the distribution business.
The Heavy Burden of Advisory Compliance
Riddhiman Jain of Waterfield Advisors explains the compliance burden. A pure advisory model requires detailed client profiling, documented risk assessments, formal investment policy statements, and mandatory suitability checks for every recommendation. These processes ensure advice aligns perfectly with a client's goals and risk tolerance.
While some distributors may follow similar practices voluntarily, they are not legally required to do so. For registered investment advisors, these steps are compulsory. This raises operational costs and demands significant effort to educate clients about the value of paying for advice.
"In advisory, fees are entirely out of pocket," says Jain. "The advisor raises an invoice, and the client pays directly. This is very different from distribution, where the client doesn't see a direct cost because commissions are embedded in the product."
A Reluctant Industry and Mixed Models
Azeez points out a further complication. He argues that even advisory services in India are often not practiced in their true spirit. Many firms attempt to combine advisory and distribution within the same entity. This creates an inherent bias.
When a company earns commissions by distributing a particular asset manager's products, there is a natural tendency to recommend those same products to its advisory clients. Sebi has repeatedly refined its guidelines over the years precisely because the industry has been reluctant to follow the framework in both letter and spirit.
Despite these challenges, some see change on the horizon. A spokesperson for 360 One noted that while advisory currently holds a smaller share of industry assets, global trends show adoption accelerates as wealth markets mature. They believe India is now entering that phase, with fee-based advisory emerging as the preferred model for core investment portfolios.
The stakes are enormous. Bernstein research estimates India's serviceable wealth will triple from $3 trillion in FY25 to a staggering $9 trillion by FY35. How this vast wealth is managed—through conflicted commissions or transparent fees—will shape the financial security of millions of Indians.
