Are you sharing agents commission ?

Its Illegal
Discount kitna doge ! Mishra ji mujhe 35% de rahe hain , as per Rakesh ,this is exactly how a lot of customers ask
their agents commission to be shared with them in Insurance or Mutual funds. Have you ever asked your agent how
much discount he can give you on the premium? This happens a lot with LIC agents and other insurance and mutual
fund agents. Many times, even agents offer discount or some gift in return, if you buy the policy or mutual funds through
them. This practice is illegal and totally against the laws of Insurance Act and SEBI. The agent can even face
cancellation of his license if he is found to share his commission. (Read about agents
commission in Insurance and Mutual funds)

It kinda works like this. Suppose, an Insurance agent sells you a policy with a sum assured of Rs. 10 lacs, with a
premium of about Rs. 50,000/- per year. An agent will make around 15,000 in commission for that year, out of which he
might offer you a discount of Rs 5,000-10,000 for the first year or he offers you some gift! A lot of insurance agents do
this to make sure they do not lose the business or get more and more business . In the same manner, if you have Rs.
30 lacs invested in mutual funds, your agent will get around Rs 10,000/- in trail commissions. It might happen that he
can offer you 50% of that commission to make sure you stay with him .

Why you should stop asking share in Agents commission ?

Mutual funds : As per SEBI mandate, sharing the commissions received from AMC is illegal and should be
avoided .Pass-backs, the practice of sharing a part of the distributors commission with the investor, have been made
illegal under the code of conduct issued to distributors. Intermediaries will not rebate commissions back to investors
and avoid attracting clients through temptations of rebate/gifts etc As per a SEBI circular.
If a mutual fund agent shares his commission with others, it opens a big hole, not just for mis-selling, but also dilutes the
whole industry atmosphere. There have been rampant cases, when an agent asks customers to leave their current
agent and transfer their funds with them as a new agent (link) and they are ready to transfer a part of agent commission
to them (the customers). For example, if a person has Rs 30 lacs invested in a mutual funds, an agent would get around
Rs. 10,000/- as trail commission in a particular year. A lot of agents offer 5,000 (50%) back to the customers to attract
them. A lot of agents pass back a part of commission and customers get into wrong & ill-suited mutual funds because of
their greed!
Insurance : Other than the fact, that its illegal, you should not encourage or engage in sharing the agent commissions
because, for one thing, it hampers your relationship with agent. Dont forget that your agent will be the one to help in
claim settlement when you are dead. If you snatch his share of commission today, it might leave him with a bitter taste
in the mouth and not result in a healthy relationship. So please live and let live! The other important reason, you should
avoid asking for agents commissions, is that it leads to mis-selling. If you ask for a share in commission, it will leave
agents with less earnings and that would encourage them to sell more by any means, which in turn fuels mis-selling. So
in a way the whole asking commissions back will hamper investors in the long run. What you sow is what you reap!
As per section 41 of the Insurance Act, No person shall allow or offer to allow, either directly or indirectly, as an
inducement to any person to take out or renew or continue an insurance in respect of any kind of risk relating to lives or
property in India, any rebate of the whole or part of the commission payable or any rebate of the premium shown on the
policy, nor shall any person taking out OR renewing or continuing a policy accept any rebate, except such rebate as
may be allowed in accordance with the published prospectuses or tables of the insurer.

Real Life experience

As per Dhawal Sharma, a Delhi based agent shares his experience
I face this problem day in and day out and many a times have to miss out on prospective clients because they want
passback of commission. This practice (Sorry to say, but started by LIC agents) is so much part of the Insurance
selling culture that 99.9% of the public thinks that it is obligatory on the part of an agent to part with his commission. But
even LIC agents were quite smart at that time as they use to pass back comission mostly on ENDOWMENT or
MONEYBACK policies which generate hefty renewal commissions as well (Unlike ULIP) and reversely, would be of little
or practically no use to the client in the long term. This practice is actually pound foolish , penny wise approach..
I know at least 100 people, regularly buying insurance for their entire family (father , mother, brother,uncle, aunty) for
last so many years from SHARMA JI or OFFICE WALE CLERK who passback 20% commission, and if we make a
thorough study of their Insurance portfolio, they are underinsured (No term plan), not properly equipped to handle

retirement (their agent never knew that annuity fund is tax exempt only upto 1/3 amount), and no proper child planning
(In many cases, child plans where child is life insurand and not father).

Violation of law using Multi-level marketing in Insurance Policies

For some years now, a new way of selling is evolving. Its called MLM. Here a big agent sells a policy to some one and
makes him a customer. Now, this customer also acts like an agent and starts adding new people in the network and
sells them policies. This goes on to many levels, a person earns a part of commissions earned from every person under
his personal network. This whole idea of multi-chain selling violates Insurance law and is illegal.
As per Section 41 of the Insurance Act, A licensed agent, whether individual or corporate, cant appoint a sub-agent
and pass on a commission to another person or entity. Any passing of commission by an agent is construed as rebating
and is prohibited under the Act.
There are many companies operating in different part of our country like TLC Insurance (India) in Bangalore, RMP
Infotec in Chennai, Golden Trust Financial Services in Kolkata and SecureLIFE out of New Delhi (read more here
and here)

Responsible Investor = Health Industry

We as buyers, shape this whole industry based on how we act. Over the years, we expected and asked for share in
agents commissions, without realising that it will one day work against us resulting in misselling. So please do not
support it! A couple of hundreds or thousands is not going to make you rich or poor, but it sure dilutes the whole
environment!
Have you ever experienced a situation where agent has tried to give back his commission? Do you think if everyone
stops asking for any agents commission back, it can really have any impact?

Power of Compounding and Early Investing

This post talks about the importance of Investing early in life and do not get late at all. Also it shows how powerful
compound interest and regular investing is. When we invest early in our lives, the amount keeps growing and when it
becomes a big chunk, the growth in amount every year is a lot more, compared to initial years .
For Example: Suppose you start in 2008 and want to save for retirement and If regularly invest 1 lacs every year at
15% return per Annam , the investment will be Rs 4.35 Crores in 2038 , but if you do late for 2 years and start in 2010 ,
it will be Rs 3.27 Crores only by 2038 , that will leave you with Rs 1.08 Crore less money.
Even a delay of 1 year will result in total corpus of Rs 3.77 Crores , which is short of Rs. 58 Lacs. This 58 Lacks is
nothing but 15% interest on 3.77 Crores which you missed.

This happens because in later years you dont get benefit of compounding.
Below is the table of how Rs 1 lac will grow with different interest rates and different time lines.

(click to enlarge the file)

Lets see two Case studies and there results of early investing:
CASE STUDY 1
Robert and Ajay start career same time at age 23
Case 1 (Ajay) :
Understand the importance of investing Early, enjoys some time and then
Start investing early (at 25) and invests Rs 50,000 every year.
Assuming 10% return every year , accumulates Rs 7.97 lakh at the end of 10th year. (This is annuity , dont confuse
with Compound interest
)

Stops after that and doesnt invest extra money till he is 65 , he just leaves that 7.97 lacks in investment and that
keeps growing.
when he is 65 , he has Rs 1 Crore 40 Lacs

Case 2 (Robert):
Spends a lot and doesnt believe in investing early, and when he is 35 he starts investing for next 30 years he
regularly invests 50,000 till he is 65.
Assuming the same return of 10% per year.
He has only 82.2 lacs

Even after saving for extra 20 years Robert has 43% less than Ajay .
Total amount after n years with A amount every year at i .

return=A *[(1+i)^n-1]/i
Ref : http://en.wikipedia.org/wiki/Annuity_(finance_theory)
CASE STUDY 2
After 100 years : Robert from Robertsganj and Ajay from Haryana (rebirth) , This time Robert is extra smart and Ajay is
a Software Engineer.
Both are 25 and want to retire at 60 , both earn good money (both can invest 1 lac per/year) assuming return at
12% per/Annam
Case 1 : Robert starts early , invests 1 lac each year for next 10 years, In this 10 years his money grows to good
amount and he just keep that money invested till he retires , he can invest for another 20 years also but now he
spends all this 1 lac for travelling and enjoying his life every year
Case 2 : Ajay thinks Robert is an Idiot, who is not enjoying his life, what bad will happen if he starts after 5 years , he
thinks lets enjoy some years .
Case 2.1 : After 5 yrs he starts investing 1 lac every year for next 5 year He sees that Robert has stopped investing
now and enjoying now, so he also does same , stops investing and leaves his money invested which is growing
Case 2.2 : After 5 yrs Ajay starts investing and thinks that he will now invest for next 30 years till his retirement, he
wants to have more money than Robert at the end.
Results at 12% return
Case 2.1 : Ajay get how much ??
66 lacs
Case 2.2 Ajay gets ??
1.64 crore
And what about Robert? investing 10 yrs and stopping after that and enjoying for next 20 years
1.72 crores !!
I would be happy to read your comments or disagreement on any topic. Please leave a comment.