At the Financial Planning Standards Board’s annual congress last week in Mumbai, in which Mint was a media partner, the theme was consumer protection. Panellist Nilesh Shah of Axis Bank began his comments with this horse tale. In emperor Akbar’s stable there was a horse that preferred to eat grass over oats. No amount of cajoling could get him to eat the more nutritious meal. Then trusty Birbal comes up and says give me a month and I will ensure the horse eats the oats. Akbar says OK. A month later the horse is eating oats. How did you do that, asks Akbar. Each time he ate grass, I hit him on the head, smiles Birbal with some satisfaction. Now he’s learnt to eat oats. In Shah’s story, the investor is the horse who’s learnt to eat grass (real estate and gold) because each time he tried to eat oats (market-linked financial products), he was hit hard on the head.
As speaker after speaker lamented the lack of retail participation in financial markets and the predominance of real estate and gold in household portfolios, perhaps the gaze should have turned inwards rather than outwards. I was reading the Financial Advisory Industry Review (FAIR) panel report prepared by the Monetary Authority of Singapore (http://sg.sg/WhqDfr) that suggests ideas to improve the financial advisory industry and was struck by the consumer focus. The aim of increasing efficiency and delivering better quality advice was to enhance the financial preparedness of Singaporeans. In India, the focus remains the industry and how to get it to penetrate the market better, there is rare talk about raising the financial well-being of households through such products. Take metrics next. The FAIR report measures the efficacy of the insurance industry by using the metric of insurance cover and not premium. It says: “…Singaporeans are under-insured by about 3.7 times their annual income.” What do we hear in India? We need to increase insurance penetration! Did you know that the average cover in India is just Rs.1.26 lakh, while the average annual premium is about Rs.8,500. This money in a pure risk policy (term plan) would buy a 30-year-old a cover of about Rs.1 crore.
Clearly, we need to rethink the investment lexicon to get consumers at the heart of the system. We focus on words such as investor well-being and financial preparedness and we change the metrics by which we measure the success of a company. Despite more of the old, there were several ideas discussed that could make a difference. First, there must be an online solution to the current problem of uncomparable financial and real sector products. To start with, all financial products should be available in a demat form and the customer should be able to view his entire financial relationship at one place. Costs, benefits, risks and benchmarks should be comparable online. This idea should be extended to include real assets such as gold and real estate. Transaction costs, making charges, divergence of price from benchmarks should be possible online.
Second, there must be an online registry of sellers and advisers of financial products. The track record of the financial intermediary should be available to the customer online. It should be possible to see, for example, where my latest relationship manager with my bank worked earlier, for how long and what was his performance track record in terms of consumer complaints. Who should fund this? Budgets around financial literacy (they serve little purpose the way they are done today) can be used to implement these two ideas.
Third, move away from thinking only about the punitive side of this story but think more about innovative products that solve the problem. A product like the systematic investment plan (SIP) began as an idea in the head of one person more than a decade ago, but has now become an industry standard. We need more products like that and companies willing to put their commitment behind them. Fourth, make the top management responsible for mis-selling and customer well-being. See how quickly the market cleans up.
The industry and the government need to remember that if investors are moving to real assets such as property and gold there must be reasons for it. Could it be that the investor has been hit so hard each time he’s attempted to buy this invisible product in retail finance that, like the horse in Nilesh Shah’s tale, he decided to eat grass? At least it won’t get poisoned by unit-linked insurance plans (Ulips) again.
Endnote: I finally met a person who could put to rest one question that keeps coming back in every conversation about reform in retail finance distribution. My view has been consistent for the last decade: financial products are invisible and have a moment of truth that is in the far future. These two features make them different from consumer products such as biscuits or bread. But the push-back from the financial sector has consistently been that there are margins embedded in every consumer product so must they be in financial ones. Well, there is a person who was formerly in the consumer products business who now runs a life insurance company and he vehemently disagrees that biscuits and financial products can be sold in the same way.
Monika Halan works in the area of financial literacy and financial intermediation policy and is a certified financial planner. She is editor, Mint Money, and Yale World Fellow 2011. She can be reached at firstname.lastname@example.org