Decoding The Commission Disclosure On Your eCAS

It's now been eight months since SEBI mandated disclosures of expense ratios and commissions earned by intermediaries on their half-yearly eCAS (Consolidated Account Statements). The move was vocally opposed by many distributors and industry bodies, as it was believed that such as explicit disclosure may not serve customer interests in the long run, as it could end up driving novice investors down the unadvised route, to their long-term detriment.

Anecdotal evidence suggests that the impact of this disclosure has largely been felt in the wealth management space, which involves large ticket size, savvy clients. Many such clients, balking at the seemingly large rupee amount number (sometimes running into lakhs) being paid to their intermediaries, chose to go down the direct route instead.

Admittedly, as noble as the idea of disclosing commissions is; the manner in which this disclosure is taking place on the statement has left many a client reeling in confusion. There are three primary "points of confusion" with respect to the commission paid section of the eCAS. Keeping these in mind while reading your statement will help you put the number in perspective a lot more clearly.

"Commission Paid" clubbed with "TER"
In the eCAS, the commission paid number has been placed squarely beside the "TER" (Total Expense Ratio) figure. The TER for a fund, as the name suggests, is the "total" cost that is incurred in operating a mutual fund scheme. Of this, distributor commission is only a portion. TER's typically range from 0.5% to 1.5% per annum for debt funds, and 2% to 2.75% for equity funds, while earnings for intermediaries are usually less than half of this amount. In the past few months, many clients have expressed concern over their Advisors earning 2% to 2.75% of their corpus as commissions - which is an incorrect assumption, of course. Since most investors are not clearly aware of what TER's are, they automatically end up assuming that this is the percentage of their money that is being passed on to distributors.

No clear mention of earning period
The eCAS (besides a rather discreetly placed footnote) contains no clear mention of the commission earning period. Many clients end up falsely assuming that this is the monthly commission being paid out to their intermediary, when in reality, the amount shown comprises of the distributor payout made after the previous half-yearly statement - that is, in the past six months.

Absolute (Rupee) amount rather than "percentage of average assets" representation
The eCAS shows the commission paid as an absolute Rupee amount (for example: Rs. 28,305) rather than a percentage of assets figure (for example: 0.83%). Detrimentally, witnessing an absolute amount can make clients penny wise, pound foolish and prevent them from putting the distributor earnings into perspective properly. More than anything else, such a representation makes it next to impossible for a client to compare the costs associated with their Mutual Fund investments with their other investments - for instance, Life Insurance. The ideal way to represent earnings would be as an "annualized percentage of assets". For instance, of a distributor earned Rs. 5,000 on an investment whose average value was Rs. 10 lakhs during the six-month period, that works out to an annualized figure of 1% of average assets. This number (1% annualized) would no doubt go a long way in helping investors make more informed choices.

End Note for Mutual Fund Investors: Going down the unadvised route can prove costly for Mutual Fund investors, by way of poor investment decisions and poor fund choices. Use the above pointers to arrive at a ballpark estimate of how much your Advisor is earning as an annualized percentage of your assets - this will most likely be in the range of 1% to 1.5%. This is a lot lower than what intermediaries earn on traditional products such as Life Insurance. If your Advisor is creating enough value to warrant this 1% to 1.5% additional cost per annum, stick with him or her. Else - the choice of going direct always exists.