Q.32: I am a SEBI RIA, working in an individual capacity. I charge a fixed fee for financial planning service. I keep the contract duration as 1 year. Fee is payable in advance on a quarterly basis.

If total fee payable is Rs. 20,000 and date of Financial Planning Service Engagement Agreement is 1st January, fee is to be paid as follows-

Rs. 5,000 shall be due and payable on each of 1st January (for 1st quarter), 1st April (for 2nd quarter), 1st July (for 3rd quarter) and 1st October (for 4th quarter).

Recently, I had a bitter experience with a client. By quarter 1, I delivered the entire Financial Plan to him. During quarter 2, he sat with me and updated his Financial Plan. As quarter 2 is coming to an end and advance payment for quarter 3 is going to be due, at this juncture, he terminated the contract.

Basically, he took the entire Financial Plan and left by paying half the fee (without paying fees for quarters 3 & 4). On moral grounds, I feel cheated.

As major part of the work in financial planning service is done upfront and client gets the entire Financial Plan in 2-3 months, there’s every possibility that people having ill intentions can leave with the entire Financial Plan mid-way, without paying the entire fee.

Before the recent SEBI regulations came, we used to take 50% fee in advance and remaining 50% after delivering the Financial Plan.

Now, with the regulations allowing me to take 2 quarters fees in advance, I had to change my fee model and this happened. This person took advantage of the loophole.

My questions:

• Can I keep the duration of the contract as 3 to 4 months instead of 12 months? If so, how do I satisfy the regulation of charging only 2 quarters fees in advance?
• What can be a suitable fixed fee model for financial planning service which will satisfy SEBI regulations and will not leave any scope for the client to cheat the Financial Planner?

Response:

Suggested model of billing / agreement:

Charge fees to the client under Fixed fee mode.

Let the Contract duration – be for 1 year.

Also have a clause, which says, agreed services may be amended subject to mutual consent and agreement, wherein the services and fees shall be defined, however, annual fixed fee not crossing prescribed limits of 1,25,000 p.a..

In your services and fees related clause, Mention: 

(a) Q1 Services (Jan to Mar) – Financial Planning – Fees: Rs.17,000 payable on 1st January 10,000 and on 1st April 7,000

(b) Q2 Services (Apr to Jun) – Monitoring Review of Financial Plan – Fees: 1,000 payable on 1st July

(c) Q3 Services (Jul to Sep) – Monitoring Review of Financial Plan – Fees: 1,000 payable on 1st October

(d) Q4 Services (Oct to Dec) – Monitoring Review of Financial Plan – Fees: 1,000 payable on 1st Jan

Note: As per law, you can take advance, which shall not exceed fees for 2 quarters. No where in the law, it says quarterly fees means equated quarterly fees