The need for meaningful risk disclaimers
Robert Kiyosaki, author of Rich Dad, Poor Dad, said, “The biggest risk a person can take is to do nothing.” I find this true for many participants of my programme, who are typically working professionals. A majority of them still do not invest in mutual funds and when asked why, the common reply is: “Mutual funds are subject to market risk.” Essentially, these investors are scared of losing money and the disclaimer only adds to their fears. What is surprising is that except for mutual funds, the risk disclaimers are not considered important or even remembered for other investment instruments such as insurance, gold schemes, and small savings schemes.
While most urban Indians own an insurance policy, they have never given importance to the disclaimer: “Insurance is the subject matter of solicitation.” Let us understand what this phrase means. It essentially means that insurance has to be requested or asked for, and not sold. So, customers need to engage with intermediaries who have to suggest a policy based on the client’s requirements and that insurance can (be bought but) not be sold. So, the onus of choosing the right product is on the customer; it is not the seller’s responsibility. A policy is supposed to provide a customer insurance against a risk, defined by the customer and based on the customer’s request. However, in reality almost all policies are hard-sold to customers as guaranteed-return, tax-saving options. How many investors actually have a goal in mind when they buy an investment-linked insurance policies? So is the risk disclaimer really helping any individual who is buying a policy? It also does not address the market risk that is present in investment-linked insurance products.
These policies do not give guaranteed returns, yet people are not willing to believe this and continuously invest in such schemes. Customers are at a bigger risk dealing with insurance agents, who for long have pushed products for commissions.
Recently, I was at a coffee shop and at the adjacent table was a differently abled person with a representative of an insurance company. The agent was continuously goading the gentleman to buy a policy by assuring doubling of the money in a few years and, of course, for tax saving. The gentleman also did not question him as to how the money would double in a few years or where the company would invest to get these returns. I routinely come across such cases where people have been mis-sold policies and they have realized their mistake only later on.
Market risk is present in every investment product. But people are not willing to accept that even products like insurance, gold, and real estate carry market risk. Take the case of gold and gold schemes from jewellers. Gold prices have been falling for the past five years; yet Indians continue to buy gold in the belief that it will suddenly move up. While they don’t want to risk investing in equities, they are willing to buy gold and hold it for years even though it is depreciating. The other risky investment is gold schemes by jewellers. In such schemes, the risk of default by the jeweller is ignored, also because there is no risk disclaimer mandated for such investments.
Products like company fixed deposits also do not have risk disclaimers attached to them even though they carry the default risk.
Real estate has a huge market risk attached but given the decades of good returns, people are not willing to accept that prices could actually fall in this segment.
The main issue is of mindset conditioning, coupled with ignorance. Across generations, people have traditionally invested in insurance, gold and real estate on the basis of absolute gains rather than looking at the risks involved and the actual returns made. How many investors would have calculated the risk-adjusted returns on such investments? Or even thought that these instruments carry equal if not more market risks in the form of price fluctuations, just the way mutual funds do?
So what can be done to change the mindset? First, it should be mandatory for every investment product to carry a risk disclaimer.
The disclaimers need to be easy and simple to understand. More importantly, there needs to be a common disclaimer across all products with similar risks. So, mutual funds and unit-linked insurance plans (Ulips) should have a common disclaimer. The current risk disclaimer on insurance, which is abstract and vague, needs to go. Similarly, for products like company fixed deposits and gold schemes from jewellers, a risk disclaimer highlighting the risk of default needs to be introduced.
Second, given the systemic issue of mis-selling of products, the onus of choosing the right product cannot lie with the customer alone. Companies cannot absolve themselves by getting investors to sign lengthy fine-print disclaimers. The company agents should also be made to sign a declaration that they recommended the right product based on customer requirements. There also need to be random checks done by companies to check with customers about the suitability of products suggested by intermediaries, especially in cases like a differently abled person buying insurance.
Finally, investors need to spend some time reading about the risks associated with various instruments rather than blindly following their previous generations or taking advice from family and friends and repenting later on. Jaago investor jaago (wake up investor, wake up).
Mrin Agarwal is financial educator; founder director, Finsafe India Pvt. Ltd; and co-founder, Womantra