Monday, May 3, 2010

Mutual funds see no gain from IRDA move on agent fee disclosure

Even as the Insurance Regulatory and Development Authority (IRDA) asks insurance companies to disclose commissions paid to agents, mutual fund experts say the step is not enough to create a level playing field for mutual funds vis-à-vis ULIPs. It will take some time for the mutual fund industry to recover from the dip in distributor revenue due to the entry load ban, the experts observe.

The ban on entry load for mutual fund products last year had sparked off the confrontation between the insurance and mutual fund industries on the non-uniformity of the commission structure. According to industry insiders, nearly half of the country's independent financial advisors selling mutual funds have quit due to the ban on entry load. They say that many distributors have also chosen to sell ULIPs rather than mutual funds as the former offered more lucrative commissions.

ULIP Vs. mutual fund

Some observers also see the recent spat between the Securities and Exchange Board of India (SEBI) and IRDA on the jurisdiction of ULIP as a fallout of this clash of interests.

“The basic idea behind SEBI's move to claim jurisdiction of ULIP is to bring parity in commissions,” says the head of a mutual fund company on condition of anonymity.

Since the ban on entry load, upfront commission for mutual fund distributors has been slashed from about 2.5 per cent to 0.5 per cent. In contrast, the upfront commission for ULIPs remains 20-40 per cent even after the recent cap on charges.

Phased changeover

“Any move by the insurance regulator which infuses transparency in the system is welcome; but such changes should be phased and not rushed into. It will take at least a year for the mutual fund industry to regain the business of pre-entry load barrier days,” Mr Rajiv Deep Bajaj, Vice-Chairman and Managing Director, Bajaj Capital said. The revenues from Bajaj Capital's mutual fund business dropped 40 per cent in the last 6-8 months, and this was more or less compensated by the rise in revenues from ULIPs and fixed income instruments, he added.

While distributors are gearing up to charge commissions directly from investors for advisory services, only about 30 per cent of customers are willing to pay the additional fee, Mr Bajaj said. “The strategy for the remaining 70 per cent would be to reduce operating cost by using online medium and impart more efficiency in the distribution system,” he said. Investors generally would prefer to pay commission for financial instruments if it was embedded in the product pricing and not on a voluntary basis, he pointed out.

Mr Atul Suchak, an independent financial adviser said, “We are trying to mitigate the fall in charges by acquiring more customers by offering innovative and interpersonal advisory services.”


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