Twenty years ago, associating the word consumer with financial products was difficult, if not impossible. That is not to say that people didn’t save, but the financial universe for them was restricted to fixed deposits in state-owned banks and tax-saving life insurance policies from Life Insurance Corp. of India and the erstwhile Unit Trust of India.
There were few who would want to cross the debt investment line and fewer institutions that could help them do so. Cut to the present: markets have evolved and so have we as consumers. “Consumers have gained a lot from competition and companies today are aware of their responsibilities,” says Sharad Sarin, a marketing professor at Xavier Labour Research Institute, Jamshedpur, and an expert on consumer behaviour.
Though we as consumer have come of age, there is still a long way to go. We take the opportunity today on World Consumer Rights Day (first observed in 1983 to recognize and safeguard the interests of consumers) to bring forth some of the challenges that still exist.
Spoilt for choice
The market offers choices like never before, but with each choice comes a sales pitch making each one of them attractive. For instance, there are 23 life insurance companies in the market today and each one of them have a bouquet of policies. So how do you know which one is for you.
“In the financial products market, there is a malpractice of hard sell. The consumer should be self-empowered and should take a buying decision only after a needs analysis,” says Rajiv Bajaj, vice-chairman and managing director, Bajaj Capital Ltd.
So while we maintain that a term plan is the best life insurance product for someone who has dependants, one can consider unit-linked insurance plans (Ulips) for long-term goal-based saving, such as child’s education.
Lack of awareness
To make a choice, one needs to be armed with adequate information. Unfortunately, awareness about financial products and investment opportunities is still abysmally low, especially in tier II and tier III cities. Says Surya Bhatia, chief financial planner and principal consultant, Asset Managers, a New Delhi-based financial planning firm: “We are in the right direction, but we need to continue because awareness has not reached every strata of the society. Though metro cities are relatively better off, tier II and III population is far from understanding complex financial products.”
Know that every product is meant for a different individual with a unique set of circumstances, financial or otherwise.
Cases of senior citizens being mis-sold life insurance policies or being pursued to invest heavily in equities are not uncommon. “While we may recommend equities for a young individual starting out in his career and having no dependants, we would advise senior citizens to stick to debt mostly. However, a small portion should should go towards growth investments,” says B. Srinivasan, a Bangalore-based financial planner.
While the financial market needs to evolve to become more friendly, consumers, too, need to wake up. Says Bajaj: “People spend 95% of their time to earn money. So they should at least spend at least 2% of their time to make sure their investments are safe. One should definitely seek advice from qualified professionals before buying any financial product.”
The fine print
Financial products are on the road to reforms, thanks to the sustained effort of the various regulators. Mutual funds moved to a no-load regime in 2009, Ulips shed their costs in 2010, disclosures have been made mandatory; several other loopholes have been plugged.
However, there is still the hidden fine print to be understood. For example, an equated monthly instalment-sharing real estate deal may fit your budget, but looking at it in isolation may cause a crunch a few months later. Caveats such as high interest rates need to be taken into account when entering such deals.
Similarly, the internal rates of return in insurance policy illustrations (that clearly disclose costs and expected returns for two growth rates) of some companies does not take into account all the cost heads.
The same is true for stock investing. “Disclosures are not high enough in certain areas. Investors should be made aware of the risks involved properly by brokerage houses before money is invested,” says Bajaj.
Do it yourself
Buying an insurance policy or a mutual fund or filing your tax returns is now just a few clicks away. “One-fifth of the consumers today belong to the category of ‘do-it-yourself’,” says Bajaj. And for them, this medium is really convenient.
However, here too problems exist. There is hardly any interface where your problems can be addressed. “The local offices of any insurer who offers online insurance are of little help. One has to approach the central offices,” says Srinivasan.
There are advantages that you as a consumer get in this evolved market, but then you have to tread carefully to get maximum returns.