We started this blog on 18th July 2008 just 12 days before ban on entry load in mutual funds. Our first article was Mis-selling month – it was very clear that there is rampant mis-selling in insurance and other financial products. There is no surprise that JULY 2008 generated highest ever gross selling figures in equity schemes in mutual fund industry. Last month I met one investor who was still paying entry load on his SIPs & STPs. In last 18 months his agent never told him that he can discontinue the SIPs & restart them again.
Agents have become part of the problem and not the part of solution. You would be shocked by reading my last sentence… but it’s true.
The philosophy of Angel and Satan also exists in financial business. And in practical when it comes to intermediaries, rarely you find an angel by your side. Today we would try to figure out how different financial intermediary and manufacturers are playing games with innocent investors. This time we would focus on latest negative trends in financial industry which are used to make investors fool.
What is the Big News – Changes in Life Insurance Industry
At the outset, you must know that regulators in financial industry have started working in the direction to make users of product more beneficial and to make sure that the mis-selling tactics both by agents and manufacturers can be curbed. This all started with SEBI’s order to make Mutual Fund a “No Entry Load” product from August 1, 2009. Now if you invest in any mutual fund, you shall not be charged any entry load which used to be as high as 3% in equity funds. The results of such regulations are clearly visible as distributors of mutual fund have started advising investors for long term wealth creation rather than churning their portfolio. A lot of emphasis is there to make investors understand the benefits of Systematic Investment Plan (SIP).
Another impact of SEBI’s regulation was that Insurance regulator IRDA was also put under pressure to work for policy holders rather than manufacturers and intermediary. As we had written earlier that Insurance is the most expensive way to invest. The reason was the exuberant commissions that Agents were getting by deducting money from your premiums.
Earlier, commission of agents were as high as 40 to 50% of your first years premium and in later years, he used to get very less commission on renewals. This was the reason that many of the investors in insurance always are in search of their agents after the payment of first premium. Now IRDA have tweaked the way expenses will be charged in ULIPs from “front loaded” to “staggered approach” manner.
Now Insurance companies are trying to find out new ways to charge investors and already they have raised the rates of MORTALITY CHARGES. Table below provides you the charges on mortality before and after 1 September, 2010. (Read How to exit Mis-sold insurance Policies)
ULIPs will now be sold as a long term product but for keeping your investment profile simple and easy, we still recommend that the Investment portfolio should be separate from Insurance and for insurance need one should take Term Insurance only. The changes in Regulation came into effect from September 1, 2010.
So your insurance agent should have sold you policies before 1st September 2010. If you would have bought insurance policy after September 1, you would be more beneficial, but mind you, insurance agents and bankers have sold insurance in the month of August so aggressively as if after August no one can buy insurance.
What are Insurance Agents now advising?
Agents are now giving emphasis on TRADITIONAL product of Insurance like Endowment, Money Back etc which still offers them a good commission of 25-40%. Make no mistake, it is much better to invest in PF/PPF rather than taking such traditional policy. The returns from traditional policy will nowhere be close to that offered by PF.
Mis-selling on Mutual Fund side
We believe that Mutual Funds are best way to invest but even here many distributors take investors for ride. In Mutual Fund side, Monthly Income Plans are sold aggressively by distributors and within one year the overall AUM in MIPs have increased more than 8 times; not because the product has suddenly become so good for investors but the reason is the sheer greed of agents who now get more commission in MIPs than in Equity Funds. Systematic Transfer Plan from MIP is another way to take investors for a ride. Also year end is approaching, so soon you will find your agent asking you to invest a big amount in one go as he may be receiving a foriegn trip on your business.
You can read Mis-Selling tricks by Mutual Fund & Insurance Agents
What Bankers are doing
Bankers and other intermediary are selling Portfolio Management Products (PMS), other private Equity Products, Structured Products etc. Such products are not regulated by any regulator and again investors are advised to take informed decision before they become victim of some mis-selling tricks. Often investors are asked to take loan on their endowment policies and take another ULIP policy. This means that investor starts leveraging on their assets.
Now a day’s gold is on run and we come across many investors also asking about it. We believe that Gold needs to part of portfolio as an insurance and not as investment. But since this asset class is rising, Mutual Funds are coming with Gold ETF one after one. Gold loans are creating another Bubble as it happened in Sub-Prime crisis of US, where people borrowed by pledging their real estate and they thought that real estate can never go down. Please beware of Gold Loans as it may result in DEBT TRAP.
So have you got the forms – the great Indian IPO mania is back 😉 Investor think that IPOs are good Investment Vehicle but in reality they are against investor’s interest as they arrive in market when promoters are sure that they will fetch good premium.
Don’t listen to us Just read what Mr Bhave(SEBI Chairman) is saying:
“In a bid to maximize return of promoters, investment bankers are not looking at the interests of investors. “
Read more articles related to Mis-Selling
As Warren Buffet says, investors need to do very little things right as long as he/she avoids big mistakes. We just want the readers of TFL to be aware of what is going on and how NOT to make mistakes.
Have you ever faced mis-selling? Don’t tell me your answer is NO.