Many articles, many opinions and many comments across various newspapers, business channels and internet predominantly paint the agents in black…as if the “entire” blame for mis-selling rests with the agents.
I wonder!
Of course, there are many agents who have indeed wholeheartedly taken undue advantage of the low levels of financial literacy and ripped their clients to fill their pockets.
But, in my opinion, their principals — viz. the insurance companies, banks and mutual funds — are equal partners in this misdeed.
Here are a few examples.
a) Consider the advertisements issued by many banks regarding their fixed deposit schemes. More often than not, you will find them advertising ‘inflated’ returns on their FDs.
For example an interest rate of 9.25% p.a. is being advertised as giving an “Annualized Yield” of 11.59% (for 3-5 yr FDs), 13.48% (for 5-8 yr FDs) and 14.95% (for 10-yr FDs). This is WRONG. This is not the correct way to calculate “Annualized Yield”.
c) Till a few years back Mutual Funds were launching many New Fund Offers. Excepting a very few, none of these had anything “new” to offer. Most of these were merely clones of their existing schemes. Why?
Because people thought that new schemes launched at Rs.10 NAV were cheaper than the existing schemes whose NAVs had already appreciated. Mutual Funds did nothing to dispel this misconception and continued to take people for a ride. Since new schemes were allowed to charge higher entry loads, both MF companies and agents made hundreds of crores in commissions — at the investors’ expense.
SEBI, very rightly, put a ban on all this. MFs killed the golden goose for short term profits. And now they are struggling to even survive.
So what can we conclude from the above?
Clearly, the banks, mutual funds and insurance companies are equally responsible for the mis-selling.
Had MFs not launched the NFOs, naturally agents couldn’t have sold them. If insurance companies give correct picture about their policies, naturally agents won’t be able to misinform and misguide the investors.
MFs have already paid a price for their offense. If the respective regulators for the banks and insurance companies also get cracking and bring in strict regulations, even banks and insurance companies will go the MFs way. (By the way, insurance companies have already got a taste of this medicine as far as ULIPs are concerned.)
This is as far as the more transparent and more regulated entities/products are concerned. It is not difficult to imagine what the situation must be with the less transparent and less regulated entities/products.
Given the situation, it is quite understandable that people in India prefer to invest in gold and property.
If insurance companies, MFs and banks want a share of this pie — which is large enough for everyone to prosper — they have to focus on good products and good practices. It has to be a win-win situation everyone… for them, their agents and, of course, their investors.
Therefore, in the LONG-TERM interest of all the parties concerned, I make an earnest request to banks, mutual funds and insurance companies — please launch simple products so that investors are attracted towards you; rather than creating a large agent force to “push” your products.
Make your products as simple as gold or property and people will come to you.
I wonder!
Of course, there are many agents who have indeed wholeheartedly taken undue advantage of the low levels of financial literacy and ripped their clients to fill their pockets.
But, in my opinion, their principals — viz. the insurance companies, banks and mutual funds — are equal partners in this misdeed.
Here are a few examples.
a) Consider the advertisements issued by many banks regarding their fixed deposit schemes. More often than not, you will find them advertising ‘inflated’ returns on their FDs.
For example an interest rate of 9.25% p.a. is being advertised as giving an “Annualized Yield” of 11.59% (for 3-5 yr FDs), 13.48% (for 5-8 yr FDs) and 14.95% (for 10-yr FDs). This is WRONG. This is not the correct way to calculate “Annualized Yield”.
Annualized yield will be the same i.e. 9.25% and will NOT increase as the term of the FD increases. Yet, RBI has not bothered to stop these misleading ads.
b) Many advertisements issued by insurance companies boldly proclaim to give 7-10% benefit (different companies use different terms) — and that too “guaranteed”. This is blatantly misleading the policy purchaser.
In common parlance, ‘benefit’ is what returns you earn on the money that you “invest”. But here the word ‘benefit’ is NOT as is commonly understood. Here this 7-10% is calculated on the Sum Assured under the policy and not on your investment. Appropriate calculations will show that the real guaranteed returns on your "investment” would only be around 2-4%.
How many people can make this distinction between real return and this so-called return on Sum Assured? Very few! Yet, IRDA has not bothered to stop these misleading ads.
b) Many advertisements issued by insurance companies boldly proclaim to give 7-10% benefit (different companies use different terms) — and that too “guaranteed”. This is blatantly misleading the policy purchaser.
In common parlance, ‘benefit’ is what returns you earn on the money that you “invest”. But here the word ‘benefit’ is NOT as is commonly understood. Here this 7-10% is calculated on the Sum Assured under the policy and not on your investment. Appropriate calculations will show that the real guaranteed returns on your "investment” would only be around 2-4%.
How many people can make this distinction between real return and this so-called return on Sum Assured? Very few! Yet, IRDA has not bothered to stop these misleading ads.
c) Till a few years back Mutual Funds were launching many New Fund Offers. Excepting a very few, none of these had anything “new” to offer. Most of these were merely clones of their existing schemes. Why?
Because people thought that new schemes launched at Rs.10 NAV were cheaper than the existing schemes whose NAVs had already appreciated. Mutual Funds did nothing to dispel this misconception and continued to take people for a ride. Since new schemes were allowed to charge higher entry loads, both MF companies and agents made hundreds of crores in commissions — at the investors’ expense.
SEBI, very rightly, put a ban on all this. MFs killed the golden goose for short term profits. And now they are struggling to even survive.
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| It is indeed sad that we can't trust some of the key persons on money matters. |
So what can we conclude from the above?
Clearly, the banks, mutual funds and insurance companies are equally responsible for the mis-selling.
Had MFs not launched the NFOs, naturally agents couldn’t have sold them. If insurance companies give correct picture about their policies, naturally agents won’t be able to misinform and misguide the investors.
MFs have already paid a price for their offense. If the respective regulators for the banks and insurance companies also get cracking and bring in strict regulations, even banks and insurance companies will go the MFs way. (By the way, insurance companies have already got a taste of this medicine as far as ULIPs are concerned.)
This is as far as the more transparent and more regulated entities/products are concerned. It is not difficult to imagine what the situation must be with the less transparent and less regulated entities/products.
Given the situation, it is quite understandable that people in India prefer to invest in gold and property.
If insurance companies, MFs and banks want a share of this pie — which is large enough for everyone to prosper — they have to focus on good products and good practices. It has to be a win-win situation everyone… for them, their agents and, of course, their investors.
Therefore, in the LONG-TERM interest of all the parties concerned, I make an earnest request to banks, mutual funds and insurance companies — please launch simple products so that investors are attracted towards you; rather than creating a large agent force to “push” your products.
Make your products as simple as gold or property and people will come to you.