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In the past couple of months, we have seen regulators take several steps to clamp down on the misselling of financial products. The most notable is the directive from Sebi to abolish entry loads in mutual funds and make it mandatory for financial distributors and advisers to disclose their compensation from the fund house for selling its schemes. This is a bold and commendable step to protect the investor’s interest.
Before 1 August 2009, investors had the option to go directly to the AMC and avoid paying the entry load, or paying over 2% load by investing through a distributor/adviser. Most investors in the latter category wanted the liberty to decide the amount they would pay based on the level of service and the value of investment. This had resulted in unofficial kickbacks. With the abolition of entry load, they can pay an amount that has been mutually agreed upon. However, this is confined to a very small set of evolved investors. Most lay investors have been buying mutual funds and paying entry loads unknowingly. This category has seen the heaviest churning because the advisers would recommend frequent buying and selling, and the investors had no clue that they were losing over 2% of their money every time they churned. The new regulation protects these investors to a large extent.
Now, we have a new set of questions:
These are valid concerns. While the Insurance Regulatory and Development Authority has taken steps to protect investors by proposing a 3% cap on Ulip expenses, it isn’t enough. The biggest problem in Ulips is high charges in the initial years of the policy and agents recommending investment only for the first few years. Then they ask their clients to stop paying the premium and sell another policy with high upfront charges. This problem will continue unless the high upfront commission is abolished and disclosure of compensation is made mandatory.
This brings some fundamental questions to the fore. Is the working of the financial services industry so flawed that it needs a regulator to correct it even on basic issues of fairness and transparency while dealing with investors? Why talk only about misselling and not about ‘mis-buying’, where individuals refuse to learn about investing and understanding the product? Worse is the investors’ resistance to paying fees to an honest financial adviser even after realising that the ‘other free advice’ can be more expensive.
For how long will people continue to believe that ‘product pushing’ is the preferred way to conduct business? Till we don’t look within and accept fundamental errors in our actions, the situation will not improve. Recently, a financial service industry veteran said, “We need a world with more humility and a lot less greed.” I agree, but my question is, how many of us can, and will, eat humble pie?
Deven Shah is Business Head, Money Mentor
