*Should financial products have uniform commissions?'** * *One danger in keeping the incentive structures common across all categories is that distributors will stop focusing on products that are more difficult to sell* *
‘If customers are to be attracted to higher-risk products, those doing the selling need incentives - uniform commissions will kill the business’ Those clamouring for standardised commissions across all financial products would do well to keep in mind Abraham Lincoln’s statement that ‘Equality of opportunity is freedom, but equality of outcome is tyranny’. Many argue for a customer-centric model instead of a commission-centric one and claim various financial products are opaque. While the idea of standardised commissions sounds idealistic, it is highly infeasible — it’s like saying that each financial product will give exactly the same returns. Good practices such as the need for transparency in advice or commissions on the basis of performance are good causes to pursue, but their pursuit must not be diluted by impractical ideas such as standardised commissions. We need to keep three key underlying facts in mind: The risk-versus-returns profile of products differs not just between various categories of financial products but also within the same category. As an illustration, while the differences between the risk-versus-returns of debt and equity products are stark, the differences between different equity products or debt products are equally vast. Each product, therefore, needs to be priced according to its underlying risk and potential return and, in turn, the commission payable to the distributor must be aligned. To bring fairness to this mix, some portion of the commission could be paid at the time of buying the product, while the balance would be paid on the basis of the performance of the product over time. Building a critical mass and ensuring deeper penetration in a developing market requires a sustainable high-volume distribution model. Basic economics tell us that this can only be built on the back of an attractive commission structure. To reach customers in the hinterland, the right financial incentives are a must for distributors to build scale. Low standardised commissions will potentially result in distributors looking for easy pickings, rather than investing in deepening the market. Given our conservative nature (look at our unproductively high savings rate), advisors and distributors in India have a huge challenge getting a very risk-averse population (that prefers investing in fixed deposits, small savings scheme and other low-yield instruments) to move to even slightly higher risk categories of investment. In order to be able to do this, the distribution and advisory force will have to be better educated and trained — to understand customer needs, to give appropriate advice and invest in building trusted relationships. This investment in training will not happen unless there is payback — initially, in the form of attractive commissions and, as relationships mature, in the form of a success and transparency-based advisory fee. In a balanced portfolio, low commission-based debt products or term plans will only be sold if the commissions on equity or ULIP plans compensate the advisor adequately, thus enabling them to sustain interest in nurturing the relationship. In a relatively free-market model, as adopted wisely by India, there will always be a thin grey line between protecting investors’ interest and over-regulating the spirit of free markets. Companies that invest in product- innovation, in building long-term performance and distribution reach and enhanced customer service infrastructure must seek and be rewarded with differentiated pricing and thus be able to pay better commissions. Ravi Trivedy Executive Director, Business Advisory, KPMG Advisory Services * --~--~---------~--~----~------------~-------~--~----~ You received this message because you are subscribed to the Google Groups ""GLOBAL SPECULATORS"" group. To post to this group, send email to [email protected] To unsubscribe from this group, send email to [email protected] For more options, visit this group at http://groups.google.com/group/globalspeculators?hl=en -~----------~----~----~----~------~----~------~--~---
