Insurance companies try to woo commission-starved mutual fund distributors   

May 14, 2010

A few days back, a Chennai-based certified financial planner (CFP) allegedly received an email communication from Aviva Life Insurance detailing two business proposals from the insurer.

The first model is ‘Business Service Associate’ (BAS) under which one distributor has to refer at least one person to the company who can pass an Insurance Regulatory & Development Authority (IRDA) examination. The distributor who referred this person enters into an agreement with the company after which he gets a business code. The former gets an amount from all the business generated by the new agent.

Moneylife could not confirm from the company that such a communication emerged from their end. The Independent Financial Advisor (IFA) who received this proposal was not available for immediate comments either. Distributors contacted by Moneylife indeed confirm that various insurance companies have approached them with similar proposals in the past and they have refused to be part of such a deal. These distributors’ core business area was selling mutual funds (MFs). Since the ban on entry load by the market regulator Securities and Exchange Board of India (SEBI), smaller intermediaries who found it unviable to continue selling MFs have been gradually shifting towards insurance products, especially Unit Linked Insurance Plans (ULIPs), which offer better commissions.

“I sell only relationship and trust with my client. It will be very difficult to stay in the business if you start selling for the extra commissions. They had met me in my office. I have received several proposals like this, which I had refused,” said Thiru Murugan, CEO, Wealth Creation & Management Services.

The benefits of this business BAS model were detailed in the email are as follows: Distributor A gets an average 20% commission in the first year plus an additional overriding commission ranging from 30%-55% and around 5% from the second year onwards. The proposal also assured marketing and advertisement support for the scheme including reimbursements of stationery, phone and staff expenses.

Aviva officials could not be contacted for immediate comments.
The second proposal is ‘Corporate Alternate Database’ (CAD), also similar to the first plan. Unlike the first plan, here the distributor only has to refer a client to the company’s exclusive manager who advises the client. Here the IFA gets 20%-55% commission depending on the product bought by the investor. Financial advisors say that such business models are prevalent among many insurance companies.

While some intermediaries question the morals of such proposals, others say that if the business is done in a fair manner there is nothing to worry about.

Established distributors believe that they prefer not to work on a referral model as it can be detrimental to their long-term relationship with the client. Financial advisors say that insurance companies have been wooing them since more than a year and especially after the SEBI’s ban on entry load.

“These sorts of plans are business models with all leading companies with minor changes but the spirit is the same. I don’t see anything wrong as long as all people are properly licensed and you work as a team manager and licensed individuals work under your code,” said Vivek Rege, CFP, VR Wealth Advisors Pvt Ltd.

“It’s like you start a business and they fund it. They don’t want to manage a big team under them. Recruiting under payroll is becoming an issue. Since IFAs know the business well they want us to sell ULIPs. They want us to manage it because IFAs can motivate better,” added Mr Rege.

“They (insurance firms) have approached me for this. In fact, since the ban on entry load by SEBI in August, I started getting calls from insurance companies. I don’t agree with this concept. I don’t want to become empanelled just for the sake of business. When I told them about my view, they (insurance firms) never got back to me. Insurance companies are not interested in selling other products like term insurance. Commission is good but I run a risk of losing all my customers whom I know from quite some time,” said Harish Mohan, MD, Time Financials. — Ravi Samalad