BackRationalize commission for insurance agents too
Rationalize commission for insurance agents too
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The short 55-word decision from the capital market regulator, the Securities and Exchange Board of India (Sebi), that abolished the upfront agent commission (currently you pay up to Rs2.25 on every Rs100 invested in a mutual fund) has created havoc in the market. Breast beating or the clink of bubbly glasses depends on who you are—a mutual fund or an insurance agent.
Also Read Monika Halan’s earlier columns
Commission bearing financial products, such as mutual fund schemes and insurance policies, run the risk of mis-selling by vendors who push products that maximise their incomes, rather than client welfare.
By taking away the incentive to push the fund that gives the most commission, Sebi’s decision will nudge the market to eventually split into chemists and doctors. The chemist will simply vend mutual fund schemes and offer no opinion on what you should buy. You will probably come to him for ease of transaction and for that, not unlike the payment to your stock broker, you will pay anything between 20 paise and 40 paise on every Rs100 of transaction.
Undiverted by the din of the new fund offer sales spiel that threw money at distributors to sell their new fund offers (there are stories of large distribution houses not even taking calls from new fund houses unless a 4% commission was on the table), you will now look very carefully at past performance, track records and annual fund management fees before you buy.
And no, you will not cut a cheque for 20 bucks each month you buy, as some fear, you will probably pay for this through an annual cheque for the service or an on-line pay-as-you-go system, not unlike the stock broking model that you are used to.
What if you don’t want to do the homework and would rather have advice from a professional? To get this, you will not go to a chemist (like you do currently) but to an entity that has the ability to offer financial advice. Which means, the adviser has a set of attributes in terms of a basic level of education and certification and is in a regulatory framework that allows you to trust his credentials. For this, you must be willing to pay an annual fee to the financial adviser, who may also vend the products himself or have tie-ups with pure vendors.
The adviser will be a tracked entity with a paper trail on the advice he gives, and will not be able to suggest a unit-linked insurance policy to a person seeking a pension product and get away with it. He will run the risk of his livelihood—his licence— being cancelled.
With this 55-word decision, we are closer to this superior way of managing the retail flow of money into the markets. A key reason that India remains stuck at low levels of household participation in financial instruments and invests still in low real return bank deposits, is the lack of trust in the product vendor – and rightly so.
You make smart choices—if you can’t trust the guy selling, you simply don’t buy the product. For this market to work, there is yet a couple of missing links. The separation of advice from vending or of a doctor from a chemist is yet to happen. Given the fact that any product bearing a load (cost or commission) has advice embedded in it, the surgery to separate the two must happen. Sebi has done it.
But one part of the market is so much in the dark ages that unless the winds of reform blow in Hyderabad (where the insurance regulator resides), you will continue to be mis-sold products and the retail market will remain small, under-developed and inefficient. The insurance regulator, compared with its capital market counterpart, is still grappling with the past. Not only are commissions embedded in the product, but are actually pushed together and collected from you in the first three years, on a product that is supposed to live for at least 15.
Some of these agent commissions are hidden away in a head called “administrative costs" that you don’t even see. So, you pay for the joy of buying a 15-year product (that you may be encouraged to churn after three years) and pay up to Rs40 on Rs100 invested, (remember we are now talking of 20-40 paise in funds for the same investment!) and worse, you continue to pay the agent a commission over the life of the product that is unlinked to the service you get. In the new post-Sebi no-load decision that is asking you to evaluate the service and pay for it, the contrast seems even starker.
Where we go from here will depend on what the insurance regulator does now. The need is for drastic reform and to separate advice from product vending, and of course, to not fall back on either the limitations of Insurance Act or the global precedents of the life insurance industry.
And also throw out the glib story that some smart insurance chief executive officer gave it eight years ago that the industry needs leg room to innovate hence the non-standardization of costs, lack of benchmarks and lack of control of the customer to evaluate and pay for the service of the agent.
If freedom was what it took, then surely after more than 50 years of insurance vending in the country, penetration would be higher than the current under 5%. The move is now from Hyderabad and the Indian retail investor is hoping that it plays ball.
Monika Halan is a certified financial planner and policy analyst in the area of financial literacy and intermediation. Your comments and personal finance queries are welcome at expenseaccount@livemint.com
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