Will retail investors ever be relieved from mis-selling?

Jul 5, 2010

In this issue:
» Domestic, overseas market offerings at their lows
» Rs 18 bn lost on account of coal mafia
» After fiscal, its trade deficit that India needs to worry about
» US financial reforms do not pass Volker’s test
» ...and more!!

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Just as we thought the insurance regulator is seeing some light, we have been proven wrong. The IRDA’s latest stand on ULIPs (insurance linked investment plans) was very encouraging. Especially the part where the regulator suggested longer lock in periods in these plans. We also like the idea of lower agent commissions as it comes at a time when ULIPs are finding more takers than mutual funds. However, all is not well it seems. Barely within a week of the new norms being issued, the mis-selling of ULIPs has resumed! A leading daily has reported insurance agents luring customers on the pretext of the revised guidelines. The latter are being ‘warned’ of higher lock in period and medical tests after the new norms are put in place!

Earlier too, these very investors were fooled on the premise of ULIPs providing insurance benefits plus excellent returns. No agent would bother to explain that ULIP premiums are much higher than those for a pure insurance product. Not to mention the risk of an exposure to stock markets. The suggestion of opting for a pure insurance product would also be skipped. As that would cost the agent his high commission.

We believe these are instances of gross exploitation of investor ignorance. It seems the regulators need to concentrate on investor education as well. Else, the commission hungry agents will continue to exploit retail investors one way or the other.

What else do you think can be done to relieve retail investors from being exploited? Share your views with us.

 Chart of the day
It is said that market sentiments are as important as valuations if not more for equity related offerings such as IPOs. Little wonder then that when sentiments remained rather muted for stock markets in India during the second quarter of 2010, equity market offerings also suffered a huge slowdown. As today’s chart of the day shows, both the domestic as well as the overseas market offerings remained the weakest during the second quarter of 2010 if data for the last one year is taken into account. As against domestic issuances of nearly Rs 450 bn during first quarter of 2010, the same during the second quarter came down to Rs 161 bn. Not only this, at Rs 11 bn, even overseas offerings, in the form of FCCBs and depository receipts came in significantly lower than previous quarters. It is not that IPOs are not lined up, they indeed are, but they seem to be waiting for the confidence to improve a bit.

Data source: LiveMint
Note: Domestic represent IPOs, QIPs, rights, follow on offers, block deals
Overseas represent FCCBs and depository receipts (Rs 46/US$)

Minerals can generate immense wealth for countries. But they often attract organised crime, if not downright anarchy. Take India’s coal deposits for instance. At 267 billion tonnes, India has the world’s largest coal reserves. As per a leading business daily, the central government suffers an annual loss of Rs 18 bn on account of the coal mafia involved in illegal mining across different states. They plunder about 6 m tonnes of coal annually. They are primarily active in the coal-producing states of Jharkhand, Orissa and Chhattisgarh. Ironically, these are some of the poorest regions in India. They are also affected by Naxal violence. In our view, mineral wealth, poverty and bloodshed often go hand in hand. Be it India’s eastern belt or Africa’s mineral rich countries. Instead of prospering from nature’s bounty, people in such regions lead lives of utter misery.

Wall Street firms and banks learnt a very hard lesson from the global financial crisis. But it seems a lesson they are not keen on implementing. Especially now when the worst of the crisis is behind them. Take the case of the latest financial reform bill put forth by the Obama administration. In it was a rule named after former Fed chairman, Paul Volcker. This rule was originally slated to completely forbid banks from running private equity and hedge funds. But banks lobbied hard against the measure. What is more, they had even garnered the support of some members of the Obama administration. And so the legislators changed the bill to allow banks to invest as much as 3% of their capital in such funds.

Little wonder then that Volcker is likely to object to the financial reform bill.The Obama administration talked a lot about restricting risky activities of banks. But it appears that it was all probably to gain political mileage. In the meanwhile, banks will find a way to get around these restrictions.

India’s faster recovery from the global financial crisis has spelt good news for its economy. But this appears to be a double edged sword. It is likely that India’s trade deficit will widen in FY11. This is because the economy is rebounding. This is then raising the demand for manufacturing and oil imports. In the meanwhile, exports have taken a slight hit especially in software. This is on account of the debt crisis in Europe. A positive development for India then would be an easing off of the crisis in Europe. This would then bolster exports and reduce some pressure on the trade account.

The spoke in the wheel could however be oil prices. If the latter heads north, it would only worsen the trade deficit further. This is because India imports nearly two thirds of the oil that it consumes. For the time being, it is indeed important that the Europe crisis does not deepen further lest more pressure is heaped on India’s trade account.

That the global economy is getting increasingly wobbly is on evidence yet again. Barton Biggs, one of the most closely followed investors in the world has apparently cut his stock investments by half. “I’m not wildly bearish, but I don’t want to have a lot of risk at this point. I just want to have less exposure at a time like this”, the septuagenarian Biggs is believed to have told Bloomberg recently. Biggs, like other seasoned investors is concerned about the Government’s austerity measures. He believes that it would be a mistake to rein in government spending at a time when the global economic growth is weakening. He believes that we could have not just a soft patch but a double dip which lasts 2-3 quarters and where nominal GDP is only up 2 or 3%.

Fortunately, investors like Biggs have a choice whether to invest or withdraw money from the markets. Governments though have no such easy choices. It seems like they are stuck between the rock and the hard place. Loosening further would mean imperiling the already grave debt position. Whereas not doing it means inviting the wrath of their electorate. Taking into account their track record, they would certainly opt for further loosening and try and push the debt burden to future generations. And that may not be a very good thing from an inflation point of view.

Hopefuls of accelerated global economic recovery too had to do some reality check last week. Most of the economic data from developed economies showed signs of the recovery losing steam. The general consensus is that the risk appetite of global investors has taken a hit. And that most of the money invested in risky assets may take flight back to safety. In such a scenario, the fortune of the rupee against the US dollar is unlikely to be very bright. In fact global macro economics will continue to play a very important role in determining the fate of the currencies.

The author of our newly introduced column on Equitymaster ‘A Fresh Perspective’ has some interesting insights to share on commodity and currency markets. In his maiden article he takes readers through the journey of understanding the relationship between the rupee and the US dollar.

He is often credited with predicting the crisis that befell the global financial system like a thunderbolt. Now he predicts ‘a period of economic and financial fragility’. We are talking about Nouriel Roubini. He believes, the global economy will slow down in the second half. This will be because deficit- reduction measures, especially in Europe, will hurt demand. As a result, the short-term and long-term debt of countries not yet subject to sovereign debt concern will be havens for investors. These countries include Germany and the US. In our view, this might change in the long term. True, the US has not faced a sovereign debt crisis so far. But with its budget deficit and debt burden mounting, crisis does look like a strong possibility. What can happen to Greece can also happen to the US, if its policymakers don’t realise the dangers. It will just take longer.

In the meanwhile, at the time of writing this, Indian markets were trading flat in the midst of a volatile session. Stocks forming part of the PSU and energy sectors were out of investor favour. Amongst the top gainers were stocks from the banking, auto and pharma sectors. Market sentiments in other Asian regions are also mixed with Japan and Taiwan leading the gainers. European markets have also started on a mixed note.

 Today’s investing mantra
"We've long felt that the only value of stock forecasters is to make fortune tellers look good. Even now, Charlie (Munger) and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children." - Warren Buffett

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29 Responses to "Will retail investors ever be relieved from mis-selling?"


Jul 13, 2010

re the coal mafia,that gobblesup the bootie inthe mineralrich states, i have a suggestion. back in the old days when the mafia used to hijack railway wagons, after trying all the tricks, the authorities in the railway ministry numbered the wagons computerised the whole system, thus coming on top.
similarly the private and public sector trucks can also be numbered serially. if the population in the country of more than 100 crores can be identified (unique ...),so can the trucks be, and their movements. where there is a will technology will find a way.


majan prabhu

Jul 10, 2010

Some ULIP agent has responded by saying premium forULIP of Rs.15,000 is Rs5,000 where as Rs9,000 for TERM INSURENCE of similar amount.I have recently bought TERM INSURENCE cover for Rs1,00.000 for premium Rs12,100 plus tax from Birla Sun Life.Is the person is mis-selling using this platform? It is universally known that TERM insurance IS THE CHEAPEST.


Ganapathy Sastri

Jul 6, 2010

It is high time IRDA created a LEVEL Playing field between the investment portion of an insurance premium and Mutual Fund. Insurance companies charge HEFTY charges under various names - Premium Allocation charge, Plan administration charge etc etc. When you total up all charges and the SERVICE TAX of 10.3% it comes in very many cases to over 20%. There should be no charge under any name on the investment portion of the insurance premium. Let the insured understand what mortality charge he is paying and what amount of insurance he is getting before making a decision.
Also there should be NO SURRENDER charges other than 1% during the first year. This is similar to a MF charging exit load.
Wise investors do not let their HARD EARNED MONEY become HARDENED. With ULIPs that is precisely what you end up doing.



Jul 6, 2010

Service providers wants to get investment from people, agent helps them and getting rewarded with hefty commission. Instead of educating the investor, if we can highlight to become an agent to earn income better than any other job with investor amount, commission and total investments into ULIP. this publicity might attract investors to look into the agent commission.


Abhay Dixit

Jul 6, 2010

We need a strong regulator like Mr.Chandu Bhave to change IRDA from association of Insurance companies to a real regulator. IRDA in the present situation is dancing to the tunes of Insurance companies.


Nayan Desai

Jul 6, 2010

The greed of earning high commission for agents and increased share of the pie by the insurance companies force misleading and hidden agendas to fool the retail investors.
Retail investors have limited ability to analyse and play with financial figures. The regulators must force the companies to disclose the bifurcation of premiums to the customer including commissions paid to agents and the implications of non-payment or delayed payment of premiums.
Advisory organisations like yours should periodically analyse such products and circulate amongst the subscribers at least to protect them from falling in trap of these malpractices.


Purvesh Parekh

Jul 6, 2010

Make it mandatory for the insurance agents to declare their commissions to investors through a separate document attached to the insurance chart given to the investor. This letter should list the agents registration code and all the material information that an investor needs to know about the principal and agent before making an investment in a particular insurance product (ULIP/Endowment/Pure).



Jul 5, 2010

The retail investors need to be more aware of difference between Insurance ,Investment and understand the value of Term policies to cover themselves instead of ULIPS.

Need to stress more for students in 11/12/Graduation curicullam on Financial/retirement planning which includes Insurance / Mutual funds /Stocks and benefits of investing.

I think it should be mandatory for agents to declare the commision they get on these to buyers and get a physical signature on them in the regional language.


Harish Maheshwari

Jul 5, 2010

Every COIN have two sides. It depends on which side you are.
But in the case any Financial Product, it is very simple. Just do the Calculation Man !. Every man's needs are different so are the features of all the financial products. Some ULIPS work better in comparison of Term Insurance too provided you use it as Investment Tool and have the capacity of paying higher premium. Term Premium for my 15 lac Insurance is around Rs. 9000 PA for the next 30 Years whereas in my ULIP in which too 15 lac coverage is there, Mortality Charges are around Rs. 4000.00 and Policy Administrative Charges are Rs. 720.00. Total comes to less than Rs 5000.00 PA. So my cost is Rs. 4000 less than the Term Premium. In both the above cases products are from PRU ICICI (Pru Protect & ACE). So in my opinion instead of blaming other individuals, we must do our homework first and compare the various products available in the market.


Kalyan Ghosh

Jul 5, 2010

ULIP products sold by insurance company is so costly for a unit holder, I do not understand how a normal investor does not recognise this. My brother, who is an insurance agent, approached me 6 years back for selling this product.I looked at it and told him what were the drawbacks (especially high administration costs). I explained to him that how it would be better for me to take a term insurance and a mutual fund product rather than investing in ULIP.He never realised these drawbacks.Thus, it is possible that these agents may not know the full implications.

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