Differences in commissions to Insurance and Mutual Fund Agents

Here is an interesting article on differences in commission structure of Insurance and Mutual fund agents. The initial commission paid to an insurance agent is very high but all the subsequent commissions he receives are only a percentage of his new premiums. On the other hand initial commissions paid to Mutual Funds are very low. However they earn increasing amounts of commission as they receive a percentage of accumulated corpus in subsequent periods. I am reproducing the graph from the article which explains the above fact. On a Net Present Value (NPV) basis there may not be much difference between the total commissions paid for both the products.

 

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Picture taken from Economic times.

 

It would be interesting to find what factors are responsible for the differences in commission structure between the two products. Obviously the existing structure helps the Mutual funds in matching their revenue and expenditure stream. Also high initial payout might lead to high turnover. I have written on a similar topic on front end load ban here. Are there any other reasons?

In India the number of insurance agents is very high compared to the number of mutual fund agents. Maybe the immediate compensation provided by insurance products attracts more number of agents.  Remember in India in the retail segment, agents play a very significant role. So would it be more beneficial for the Mutual fund industry to shift from their existing commission structure to the commission structure of Insurance industry to attract more agents? The present commission structure of mutual funds is followed world over but that doesn’t mean we cant follow a new structure.

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Author: Bobbur Abhilash

I am a fourth year Doctoral student in the Finance and Control Department at IIM Calcutta.

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