Despite what you might have made out from the past several pages, your agent or broker is not really the devil in disguise. He’s just another salesman trying to meet a target—and trying to make more money in the process. What if the target set by his company is unrealistically steep, prompting him to sell policies by hook or by crook?

This is often the case with distribution of mutual fund schemes and with life insurance policies sold through banks, distribution outfits and wealth management firms.

Insurance sold through agents (as all insurance companies do) is driven less by targets and more by commissions— tangible and intangible benefits (e.g. a gift or a holiday).

Generally, agents are not paid a fixed salary; they get a fixed commission for each sale (see table). If they are paid a salary, it is a nominal amount; the bulk comes from commissions. Fund houses and insurance companies have their own logic when it comes to commission structures; why, for instance, the commission on Ulips, a savings-cum-investment product is so much higher than for a pure protection term cover.

In most cases, agents simply push the high-commission product. And that’s when mis-selling happens. So level of targets and structure of commission, both in the hands of institutions, encourage mis-selling—and that’s why it’s important that institutions take some of the responsibility.

It is desperation to get business that makes agents hardsell products. Since commissions vary from product to product, they sell the one that is most lucrative, which could be detrimental to the client. Certified financial planners, unlike agents, work on a fee-only basis or a feeplus-commission model. This means that there’s little chance of them mis-selling financial products as the commission is stated upfront to the client as per the board’s code of ethics.
—Shailesh Haribhakti, Chairman, Financial Standards Board (FPSB) of India

 

The commission structure has a lot to do with the way insurance selling takes place. In India, insurance commission levels are enshrined in law. This is an aspect that is left to the commercial judgment of individual companies in other countries, and not dictated by legislation. The current commission structure results in undue attention to savings-oriented products at the cost of protection products which carry low ticket size and low commission.
—R Krishnamurthy, Managing Director, Watson Wyatt Insurance Consulting

The priorities in setting up any incentive structure are transparency, fair pricing and adequate remuneration to the advisor. Mutual funds enjoy high level of transparency of disclosure and have had stringent performance representation norms. The same needs to be done for other industry participants as well. Also, advisors should be allowed to negotiate the commission with investors under a variable structure.
—Ajay Bagga, CEO, Lotus India Mutual Fund

 

Commissions are the sole form of remuneration for a life insurance agent. Life insurers design products and commission structures to provide value to both customers and distributors over the entire term of the policy. While it is true that many agents push products with a larger first-year commission, a new trend is emerging. Distributors are getting into life-stage planning, and look at the entire commission structure instead of just one year at a time.
—Shyamal Saxena, Chief Distribution & Marketing Officer, Bharti AXA Life

 

By design, accountants can advise on a product and its functionality and performance, but not necessarily on its suitability for an individual. A very insignificant number of CAs might be selling financial products. There is a lacuna in our system; today, anyone can call himself an advisor or tax consultant. There are gullible individuals who assume these tax advisors to be accountants and blindly trust them.
—Ved Jain, President, ICAI

 

When you take insurance	Year1*	Year 2 & 3*	Year 4 onwards*	Comment
A single-premium life insurance policy with Rs 1 lakh premium	Rs 2,000 (2%)	Nothing	Nothing	Relatively lower and one-time commission explains why these plans are not popular with agents and therefore with investors
Any regular premium plan of 10-year tenure with annual premium of Rs 50,000	Rs 17,500 (35%)	Rs 3,750 (7.5%) in year 2 and 3	Rs 2,500 (5%) from the 4th year	The significant fall in commission from the third year is a reason why agents may suggest you to foreclose policies after 3 years. If he is really unscrupulous he will encourage you to buy new policies every few years—instead of selling you one large cover policy for a long tenure that provides protection and is not an investment
Any regular premium insurance plan of more than 10 years tenure and annual premium of Rs 50,000	Rs 20,000 (40%)	Rs 3,750 (7.5%) in year 2 and 3	Rs 2,500 (5%) from the 4th year
* Agent/Broker/Relationship manager gets.. Rates are the maximum permitted. Actual charged may be lower

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

When you take mutual funds	Year 1*	Year 2 onwards*	Comment
An equity mutual fund scheme of Rs 50,000	Rs 1,250 (2.5%)	0.5% of fund value at the end of each year till the fund units are held	High first-year incentive is why an agent may churn your funds, than suggest long term investing
Non-equity mutual fund investment of Rs 50,000	Rs 625 (1.25%)	0.1% of fund value at the end of each year till the fund units are held	Lower commission is why these funds may not be sold aggresively
* Agent/Broker/Relationship manager gets.. Rates are the maximum permitted. Actual charged may be lower

 

 

 

 

 

 

 

  

 

When you take other financial products	Year 1*	Comment
Stocks worth Rs 50,000	Rs 150 (0.3%)	Your broker earns on the transactions (buy or sell) you make, and not on the amount of profit you may earn. Hence his incentive to encourage short- term investments.
Credit card	Rs 200-250	Forcing a card on you, because it is free, is usual practice
Home loan of Rs 20 lakh	Rs 40,000 (2%)	For an administrative job of filing and tracking your loan application in the prescribed format and carrying a sanctioned cheque to you, the agents earns a high commission
* Agent/Broker/Relationship manager gets.. Rates are the maximum permitted. Actual charged may be lower