This article in financial times talks about fund are using entry load fee to exploit naive investors and also how UK regulator is looking into the issue. As the article has noted India is ahead of Europe in this issue. Indian regulator SEBI has banned entry load of mutual funds in 2009. I have mentioned this fact in my blog earlier here.
An interesting difference I found in this article between India and UK is that Indian investors are charged less if they directly buy from the fund (direct option) while it is reverse in UK. This doesn’t make sense because if the investor directly approaches the asset management company(AMC), AMC doesn’t have to pay any amount to the intermediary and they should pass on this benefits to the investor. But it seems European AMCs prefer having investors coming through regular channels.
I think I am missing something in the whole issue. The article does note that the investors directly approaching the AMC will increase costs over the regular channels like exchange but I am still not convinced that the costs increase to that extent. because of the cost structure the investors who are approaching the AMC directly can be considered as naive investors. This is exactly opposite in India. Investors directly investing with the fund management company are considered intelligent!! In fact SEBI has been bringing several new regulations into effect to ensure that investors directly approach AMC rather than regular channels.
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.
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.