( An old piece of mine- Nothing seems to have changed)

Moneylife » Commentary » R Balakrishnan » Staying Illiterate


Have the government, regulators and financial services providers become willing partners in keeping the masses financially illiterate?

Invest 12,000 every year for three years. After five years, get 72,000. Get gold coin free. Please contact 98xxxxxxxx.” I still keep getting such spam messages. This one was from an insurance agent selling unit-linked insurance plans (ULIPs). In the above example, the returns are a mind-boggling 60%pa!

If you are foolish enough to contact them, you are likely to be persuaded to buy a lousy financial product which will only enrich the insurance agent. While marketing of financial products is becoming more dishonest and brazen by the day, mis-selling has been around for years now and regulators do not come down heavily on such practices.

I remember a ULIP product called Market Plus which received record subscription. Its marketing was primarily based on an aggressive estimation of returns from the stock markets. The Insurance Regulatory and Development Authority (IRDA) did not take any action against the insurance company. I do hope that on maturity, when the actual returns fall short of the ‘indicative’ returns, there is some class-action suit for mis-selling. Unfortunately, Indian regulators are so lax that insurance companies get away easily.

Companies and governments are spending crores of rupees on financial literacy but, unless mis-selling is controlled or unless the regulators force financial service providers into good behaviour, it will all remain lip service.

I find it extremely difficult to buy a pure term life insurance policy as the dishonest agent will divert your attention to some other policy where he earns a higher commission. It is sad that the websites of insurance companies carry such sparse information on pure insurance products. Even the website of the Life Insurance Corporation of India does not reveal the details of a pure whole life policy.

Insurance companies are keen to highlight policies where the agent makes a killing. Scanning the website www.consumercomplaints.in gives you lots of horror stories of aggrieved consumers. It also clearly shows that the insurance agent ditches you once you sign on. IRDA still pampers and protects insurance agents. The mutual fund industry too has its rogues (distributors) who, until recently, made investors switch from one scheme to another or from a new fund offering (NFO) to another NFO where the commissions were high. Now, of course, the Securities and Exchange Board of India (SEBI) is out with a vengeance to kill the fund distribution industry.

In India, regulators do not act unless someone complains to them in writing (‘bring it to the attention’, in official language). Even when complaints are bought to their notice, they take their own sweet time. In the previous issue, we had highlighted a case of SEBI acting on a complaint forwarded by Sucheta Dalal after nearly eight months! And, of course, their press release gave the impression that SEBI did all this of their own accord, without mentioning who had given them the lead.

Even after the crooks are caught, they have a way out, as the regulator makes money. SEBI has imported the American idea of ‘plea bargaining’ or ‘compounding’ of cases, under which the regulator lets off offenders against payment of money. This enables financial intermediaries to brazenly plan violations while SEBI makes money from every such opportunity.

When it comes to stocks, mis-selling is rampant too. We all know about the gross abuse of power of attorney by brokers. It is common to find tipsters offering their services in newspapers and now through the Internet and SMS. In Chennai, I see leading business papers carrying ads of such charlatans. Even astrologers and palmists have got into the game. Of course, the holier-than-thou newspapers will maintain their freedom-of-press nonsense and not cut out these revenue sources.

Literacy, as we understand it, may be rising, but masses are not financially literate. They still get attracted to high-return schemes and get voluntarily cheated. No one pauses to think that if something looks too good to be true, it usually is not. I have friends who have got into get-rich schemes that ultimately have gone kaput and then come to me for solace. I usually have no sympathy for people who let pure greed overtake reason.

While investing money, it pays to be a sceptic. For instance, insurance agents show you two scenarios, assuming returns of 6% or 10%. In reality, the returns will be closer to the lower end. I like to assume the worst-case scenario. I also like to ask the seller what is in it for him. Why is he selling the product? Surely, not because he wants to help me out of brotherly love. He is selling something because he makes money. Under such a situation, what is good for him may not be the best for me. I become extra cautious. For example, in a mutual fund product, I know that the maximum charge that I pay will be 2.50% (as prescribed by law). Insurance agents never tell you about their commissions.

Typically, they can make anything up to 40% of the premium one pays. Of course, it will go down on a sliding scale to something like 5% after a few years. Over and above this, administrative and fund management charges can eat up another three percentage points of the premium. And returns from insurance are worse than mutual fund returns, as was demonstrated by a study done by a leading distributor of both products. It must be remembered that these returns were calculated on the money invested and not on the premia paid! Actual returns would be even lower.

Fraudsters rule the financial world. Perhaps that is the order of the day, as the US showed us by bailing out crooks from Wall Street who had put the entire world economy in peril. Sometimes
I wonder whether it is worthwhile writing about financial wrongdoing and alerting people about risks in the markets and financial products. I feel that the government, regulators and financial services providers have become willing partners in keeping the masses financially illiterate.


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