Friday, January 19, 2007

Sponsor Your MF Agent For A Foreign Holiday Vacation

Read this story in ET:

Viren Mehta welcomed the new year at a holiday resort in Maldives. Later this month he will be off for a four-day vacation to Singapore. Sometime in early March he has the offer of a similar jaunt to Malaysia. But he will let that pass; after all he had been there less than a year back. By now you would be thinking of Mr Mehta as some high net worth individual who spends much of his time holidaying abroad. Far from that, Mr Mehta is just one of the many distributors of financial products in the country.

And he has the asset management companies to thank for his trips to various destinations abroad over the past few months. The need to score over competition in terms of assets under management (AUM) is forcing fund houses to come up with innovative ways to keep the top-performing agents in good humour. Besides paying commissions for the sums they raise, they also get loyalty bonuses and foreign trips as a reward for good work. Not to speak of the various awards which fund houses seemed to have engineered with the noble intention of honouring talent.

Swelling AUMs have emboldened MFs to loosen purse strings when it comes to rewarding their distributors, who are in direct contact with the investors as they can make or break the fortunes of the fund. Fund managers have to battle bulls and bears in the stock market jungle. But it is the distributors interacting directly with investors who ensure that fund managers have enough ammunition (funds) to go to war.

A foreign holiday to exotic locations is not a bad idea, many fund houses seem to think. It typically works like this. During an NFO, an agent who raises Rs 60 crore gets a trip to Malaysia, one who raises say around over 150 crore gets one to Australia and so on. Things have come to a stage these days that many agents already have exhausted all the east Asian destinations and would take one only if offered a trip to Europe or US. As this story is being written, some distributors are touring Switzerland, courtesy a generous AMC. Ditto with the various awards.

Says a Mumbai-based distributor, who has won so many awards that he has started refusing them, “Awards have their charm when you start off. But they seem to lose meaning as funds overdo it. Last time I was offered an award, I opted to stay out of the process as it brings unwanted attention on you sometimes.”

R S Srinivas Jain, chief marketing officer of SBI mutual, says that although MFs are showering these goodies on distributors and agents, it is important to remember that all the costs are borne from AMC’s pocket.

But it must be mentioned that these motivators only seem to further the vice of churning. The structure of MF commissions is biased towards new subscriptions. While new subscriptions earn commission of up to 2.5% to the agents, the trailing fees on existing assets (one given for retaining assets) is only a fraction at 0.5%. This encourages the agents to push investors to exit their current schemes and invest in new ones. Thus, while the assets under the agent remains the same, he receives fresh commission as entry load into the new scheme.

Sandesh Kirkere, CEO of Kotak AMC, has a very interesting take on this trend. He feels that for a single investor, the earnings of the distributor are roughly thrice that of an MF. “A distributor gets paid for upfront for getting a client as well as for retaining his money. While an AMC only gets money for retaining and managing the investor’s funds.”
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