BackNon-advised retail financial products are usually toxic
An average retail investor can't buy financial products without advice
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After almost 20 years of working in the personal finance space, my single most important learning is this: it is not possible for an average retail investor to buy financial products without advice. Shifting the burden of decision making and choice to the consumer of financial products hides the mala fide intent of a global financial industry, which is always steps ahead of regulators, never mind consumers. I’ve just been through a round of financial literacy workshops across the country and the sheer helplessness of the average consumer is palpable. It is manifested as anger, fear and an overall feeling of having been cheated.
The reason for the helplessness is the number of informed decisions an average household is supposed to take is beyond its capacity. The decision-maker needs to have a degree in finance. And then one in law. She also needs to know how to work an Excel sheet. Of course, she should know concepts of present and future value, be conversant with inflation, taxes and costs. And then be able to use all of these to compare thousands of products to choose the set she needs for her financial wellbeing. Indian policymakers are derisive about the Indian household’s fixation for gold and real estate. Maybe they should turn the gun towards themselves because they caused the mess in the Indian retail finance market that makes people run to the safety of physical assets rather than risk taking decisions that no average person should be expected to take.
So, what does the landscape look like for a person setting out to buy financial products? There are 10 situations that need the intervention of a financial product to smoothen out the financial journey of a household. These are: to manage cash, for borrowing, for an emergency, for protection of life, health and assets, for short-, medium- and long-term investment goals and then for retirement. To meet these needs, the market has products offered by a variety of market participants—banks, government saving vehicles, insurance (health, car, house, life), investment plans from insurance companies, pension plans from insurance companies, mutual funds, pension plans from mutual funds, gold funds, the National Pension Scheme, Public Provident Fund, small savings products, Employees’ Provident Fund—to name a few.
The first level problem is identifying which product you need. Let’s look at trying to invest for retirement. I have no issue with plenty of choice in a market place, but should this choice be from a set of options that are governed by different rules? Would we be happy if there were a different set of rules for different brands of car makers? What would we do if the car we bought turned out to be unsafe and we were told that “well, you bought from this company and that is regulated by a standard lower than the other brand which comes from a well regulated regime?" Absurd, right? But this is what happens in the retail financial product market. So, you’re in the market for a pension product. You’ll have to choose from products that are offered from companies operating under three regulators and two government departments. Your choice of the product implies the choice you make on the regulator. The regulators have different rules for retirement-oriented products. You are expected to know which regulator has what policies. Suppose you are able to make that “informed" choice, and choose an insurance company. Now, you have products from 24 companies—each will have five to 10 products that may offer a solution. You now need to work through all the features, costs and benefits of 240 products to choose your plan. Suppose you chose a mutual fund. There are 45 funds offering 415 equity schemes. You should be able to filter through these to choose the fund you want.
Remember, your analysis will take into account your ability to work through what the product costs—there are costs on entry, an annual cost, and costs on exit. Then there are taxes. And you must remember to reduce inflation from the equation so you can target a real return. Of course, it is too much to ask that costs across products under the same regulator be comparable, much less across regulators. And did you say you don’t know how to run an Excel sheet or that you find concepts of present value, future value, internal rate of return and using the XIRR function on the Excel sheet difficult? Shame! See, you deserve the toxic product you bought. So, you forget about buying these products and buy the next flat. At least you can see what you bought.
What if you are in the market for a medical cover? Well, lucky you. You have a choice of products from 28 companies. And another 15 from life insurance companies that offer health plans. Work through all of them to choose your health plan.
This is ridiculous. We need to urgently move to a policy regime that puts the onus on the manufacturer and the seller rather than loading the consumer with decisions she is simply not able to make. We must move to a seller-beware model where the onus of selling a suitable product moves to the seller. And please, can we have one regulator for all retail financial products?
Monika Halan works in the area of financial literacy and financial intermediation policy and is a certified financial planner. She is editor, Mint Money, Yale World Fellow 2011 and on the board of FPSB India. She can be reached at expenseaccount@livemint.com
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