Many (most) people think that IFA as a community look at the commission and then decide where the funds of a client have to be invested. Not wrong most of us would think this is fair – after all it is in ‘his or her’ self interest that they should act.

However many smart agents do not do this the way the clients think they do!

Yesterday I was speaking to an agent with about Rs. 60 crores in Equity assets – spread between 3 or 4 asset management houses. Even here his assets are split as follows:

A: 40%

B: 35%

C: 20%

D: 05%

He chooses to invest in A and B fund houses almost blindly between 5-6 schemes. In case of fund house C – he likes 2 of their schemes. He has done business between fund house A and B almost equally, however the higher AuM in case of fund house A is because of its better performance! In case of fund house C, he likes a balanced fund with a huge debt bias.

He looks to the fund performance, how well he and his staff are treated by the fund houses (he claims fund house A treats him like dirt – completely believe him!). However as his older SIPs are continuing to be renewed by the customers, his AuM continues to rise. Also the fund managers are good. So there is no great incentive for him to switch loyalties. However he is pushing fund house B more than fund house A!

Recently he convinced a client to invest Rs. 1.08 crore in SIPs (6 months) in fund house B – over fund house A. Why did this happen?

Well he had an altercation with fund house A – I know the full facts – and he has reasons to be aggrieved. One client got treated very, very badly (in fact cheated of one year’s NAV) by fund house A! The client does not understand what happened (only professionals in this field will understand even if I gave the full details!).

If you think fund house A will give me an arm and a leg for full details of ALL these transaction, YOU ARE WRONG. Completely wrong. I spoke to a very, very, senior person in that fund house – and frankly he was gloating about his appraisal and could not care :(.

Somebody said about there being competition in the financial services industry? Try changing a banking account, and you realise one thing – change is tough even if you are a customer!

So the fund scheme selection is not just how much commission the agent gets – it is the following:

1. How well the fund is doing over a long period of time: – it is the agent’s self interest! As the client keeps the money there for a longer period, he gets higher trail commission, so it makes sense.

2. How long the agent is planning to be in business: if he himself is planning to be in the business only for 4-5 years, he could not care about trail commission.

3. How well does the fund house treat him. Most fund houses love the cheques that the distributors bring, and hate distributors who understand the business or ask embarrassing questions!

4. How good is the back office: if the back office is bad too much time of the agent is spent on handling small queries – this makes life difficult for both the customer and the agent.

5. Clients past history of longevity of investments.