Agents cheating Agents!

As the commissions in the mutual fund industry has been eliminated agents are
finding innovative means of earning money. One such method is to approach people
with existing investments and saying ‘Sir since you have shiftend residence (retired,
married, changed jobs….could be any excuse) it is easier for you to shift ALL your
business to me. If you shift to me, it will become easy for me to give you service like
giving you a statement,….blah blah…so please shift the EXISTING business to me’.

Or just producing a letter saying ‘Please shift…folio no….to …..a new arn..”. Most
clients will not even understand what is happening, and will happily sign this letter.

The third category is a big distributor who can access the database of the asset
management companies either talk / write to the HNI customer and say ‘Please sign
this letter…and you will benefit…” One easy way is to give the ‘client’ tickets to an IPL
match..and ask him to sign one simple letter which he does not understand. LOL.

If you are wondering what is the advantage, the TRAIL COMMISSION which was to
go to the original broker who did the deal will suddenly start flowing to the new
agent. Is this right or wrong? I have no view, but clearly in 4 out of 4 cases that I
had seen this happen, the CLIENT did not KNOW that he/she had signed such a
document. In all the 4 cases, the agent who was AFFECTED was in business, was
doing business with the SAME clients, and was continuing to work with other clients
too.

Immaterial of what IFA GALAXY, FAAIDA, and other associations do, I think the
individual trying to make a career / living out of mutual fund distribution is quickly
on the road to destruction. Companies like NJ, Touchbase, Wealth zone forum, ING,
Indiainfoline,…will soon eliminate the small guy, or at least marginalize him/her and
quickly.

The industry body (ok its Christian name is the Mutual Manufacturer’s body biased
towards the big guys) has issued warning notices to HSBC, NJ India Invest, HDFC
Bank and Kotak Mahindra Bank for not complying with NOC norms and luring
investors to change distributors to garner trail commission. If you are wondering who
is N J Invest, it is the same guys who get endorsed by all mutual funds AND THE
REGULATOR in public meetings. Read Moneylife for the real story….
The Association of Mutual Funds in India (AMFI) has finally woken up to the messy
game of assets under management (AUM) transfer and rampant mis-selling of
mutual funds by banks and national distributors.

The industry body has sent warning notices to HDFC Bank, HSBC Bank, Kotak
Mahindra Bank and NJ India Invest to stop this practice, reports CNBC TV18. AMFI
has also sent a stern signal that if they don’t comply with the guidelines, AMFI will
consider withdrawing their licenses.

http://www.moneycontrol.com/news/mf-news/amfi-issues-warning-to-4-mf-
di_450778.html

Understanding Different commissions on Mutual

funds
April 25th, 2010

Today we will see how your commission is earned

from mutual funds. This is important for a customer to
know because based on this you can compensate
your agents. Its important to understand what kind of
advice you should demand from agents because they
earn money out of your investments. You can decide if
the advice given by your mutual fund agents is worth
the money you are paying or not. Apart from this you
should know how mutual funds compare with other
financial products, I found out that over a long-term
mutual funds are the most attractive products from
commissions point of view, even better than ULIP’s
andEndowment/MoneyBack policies. However in
current scenario generally investors do not remain
invested in one single financial products for long , so it
might not be 100% true.
There are 3 components of commissions earned by
Mutual Funds Agents
1) Commission from Client
This is the commission which customer pays to the
agents for their service. It generally ranges from .5% –
2% . It should depend on the quality of advice your
agent provides . This is the commission you will pay to
agent every time you do the investment . After
the abolision of entry loads, client has to compensate
the agents directly. So if you invest Rs 10,000 per
month and your agent charges commission @1% , he
gets 1% of 10,000 = Rs 100 every month. This is the
amount you have to pay agent apart from Rs 10,000
Investment.
2) Upfront Commission
Upfront commission is the commission paid by AMC
(mutual funds company) to agent in the first year. The
commission varies from one AMC to another and
varies across different categories of mutual funds.
Equity Mutual funds generally give higher upfront
commissions,whereas debt funds give lower
commissions. let us see an example of this
commission; if upfront commission is 0.5% , and your
SIP is Rs 10,000 per month , then upfront commission
would be 0.5% of 10,000 = Rs 50 per month , ie : Rs
600 for 1st year . So even if you dont pay your agent
any commission he will earn upfront commission from
AMC .
3) Trail Commission
This commission is mostly hidden from general public.
This is most important part of commissions and main
earning of mutual funds agents in long run. Trail
commission is the commission paid to agents by AMC
in subsequent years. The most important point you
should know is that trail commission is percentage of
total AUM (total worth of customer) . So if your total
Worth of investments in a particular year is Rs 10 lacs
and trail commission is 0.5% . AMC will pay 0.5% of
10 lacs = Rs 5,000 to the agent. This is the
commission paid to your agent out of your money, Its
adjusted from NAV. Which means that if an agent has
100 clients who have Rs 10 lacs of investments
(current worth , not investment) with an AMC, then
total AUM (assets under management) of that agent is
total worth of all the customers, which is Rs 10 lacs X
100 = Rs 10,00,00,000 (10 crores) . So he will get
0.5% of 10 crores = Rs 5 lacs .
So many Banks and very big agents who have AUM’s
like 1,000 crores invested through them will earn 5
crores of income per year (0.5% trail commissions) .
This is one of the big reasons why many agents entice
customers to shift their current investments to them
(Read this) . So now you know how ICICI , Kotak and
other platforms which provide mutual funds investing
through demat accounts make huge money. This is
not to say if its right or wrong. Commissions are every
where and you have to pay the price of transactions,
It’s just to tell you how our commission on financial
products are structured and how commissions from
financial products make huge money in commissions.
Most of the financial planners who make you invest
through them also make good money out of the
commissions over long run. This makes sense also
most of the times because then they can service you
better and track your investments every year properly .
Note : The trail commission is deducted out of NAV
anyways , whether you invest directly or through some
broker . If you invest directly the trail commission is
pocketed by AMC itself .
Why it’s Important to know about Trail
Commissions ?
For a client, its important to know about trail
commission and other commissions, so that he is not
a victim of Misselling , It might happen that your agent
is pushing you to buy a mutual fund which pays higher
Trail commission . For example Birla Sunlife can pay
Trail commission up to 0.75% , where as SBI pays
maximum 0.4% . That means agent will get much
more trail commissions in later years if you buy Sun
Birla Life Mutual funds from him, in which case he will
try to encourage you to buy higher paying Trail
commission products , irrespective of mutual funds
which are suitable for you . As a customer knowing
mutual funds commission structure will make sure you
evaluate the whole situation and figure out if you are
being mis-sold a mutual funds or not !! .
Mutual Funds Commissions

Mutual Fund Asset Upfront Fee Trail Commission (Annual

Company Class (Percentage) Percentage)
AIG Equity 0.40 0.40
AIG Debt 0.00 0.05 to 0.40
Birla Sunlife 0.40 to 1.75 0.20 to 0.75
Canara Robeco Equity 0.75 to 1.25 0.50 to 1.00
Canara Robeco Debt 0.00 to 1.00 0.25 to 1.00
Canara Robeco Liquid 0.00 0.05 to 0.40
Canara Robeco Guilt 0.50 0.50
DBS
Equity 0.75 to 2.75 0.40
Cholamandalam
DBS
ebt 0.00 to 1.00 0.10 to 0.35
Cholamandalam
DBS
Liquid 0.00 0.05 to 0.20
Cholamandalam
DBS
Gilt 0.00 0.40
Cholamandalam
Fidelity Mutual
Equity 0.50 to 2.00 0.50 to 0.75
funds
Fidelity Mutual
Debt 0.00 to 1.25 0.10 to 0.50
funds
Fidelity Mutual
Liquid 0.00 0.05 to 0.30
funds
Fidelity Mutual
Gilt 0.50 0.00
funds
HDFC Mutual
0.50 to 0.90 0.20 to 0.80
Funds
ING Investment Equity 0.50 0.50
ING Investment Debt 0.00 to 0.75 0.10 to 0.30
ING Investment Liquid 0.00 0.05 to 0.20
ING Investment Gilt 1.00 0.00
IDFC 0.50 0.10 to 0.80
JM Financial 0.50 to 1.00 0.05 to 0.75
Kotak Mahindra 0.05 to 0.65 0.40 to 0.50
Mirae Asset 0.50 0.50
Principal Pnb Equity 0.65 to 3.25 0.40
Principal Pnb Debt 0.00 to 0.75 0.05 to 0.65
Principal Pnb Liquid 0.00 0.05 to 0.10
Principal Pnb Gilt 0.25 0.10
Quantum Mutual
0 0
funds
Reliance Capital Equtiy 0.40 to 2.75 0.30 to 0.50
Reliance Capital Debt 0.00 to 0.90 0.05 to 0.75
Reliance Capital Liquid 0.00 0.05 to 0.35
Reliance Capital Gilt 0.00 0.50 to 0.60
SBI Mutual
0.40 0.40
funds
Sundaram BNP
0.60 to 1.75 0.20 to 0.40
Paribas
UTI 0.75 to 1.50 0.10 to 0.75
Edelweiss Equity 0.00 0.35 to 0.75
Edelweiss Debt 0.00 0.05 to 1.00
Edelweiss Liquid 0.00 0.05 to 0.20
Edelweiss Gilt 0.00 0.25
Franklin
Equity 0.50 to 2.50 0.40
Templeton
Franklin
Liquid 0.00 0.05 to 0.35
Templeton
Franklin
Debt 0.00 to 0.80 0.05 to 0.60
Templeton
Franklin
FoF 0.30 to 0.50 0.25 to 0.38
Templeton
HSBC Equtiy 0.00 to 0.50 0.40 to 0.50
HSBC Debt 0.00 to 0.80 0.05 to 0.60
HSBC Guilt 0.00 0.30
 Morgan Stanley Equity 0.65 0.50
Morgan Stanley Debt 0.00 0.20 to 1.00

Source : FundsIndia.com
Example
Here is a hypothetical example where an agent has
single customer .
 SIP per month : Rs 10,000
 Commission paid to Agent by Customer : 1% (for

every payment)
 Upfront Commission paid to Agent by AMC : 0.5%

(for First year)

 Trail Commission paid to Agent by AMC : 0.5% (for

subsequent years)

AUM (With
12%
annual Customer AMC Total
growth in commission commission(Upfront Commission(Customer
year Investment Value) (1%) & Trail = 0.5%) + AMC)

1 120,000 0 1,200 600 (upfront) 1,800

2 120,000 134,400 1,200 672 1,872

3 120,000 284,928 1,200 1,425 2,625

4 120,000 453,519 1,200 2,268 3,468

5 120,000 642,342 1,200 3,212 4,412

6 120,000 853,823 1,200 4,269 5,469

7 120,000 1,090,681 1,200 5,453 6,653

8 120,000 1,355,963 1,200 6,780 7,980

9 120,000 1,653,079 1,200 8,265 9,465

10 120,000 1,985,848 1,200 9,929 11,129

Conclusion
You will see that the general perception that mutual funds product are very cheap
products are not correct . Once a mutual funds builds a good client base who sticks
to him , the commissions on mutual funds will be much more than Insurance .