Banks are Mis-Selling or Bankers are Mis-Selling

We have always brought to your notice that insurance is grossly Mis-sold in India, specially through banks. Last week received a comment on LIC Jeevan Vriddhi Article – which was shocking, as bankers are clearly fooling their clients with support of their bancassurance tie-ups.

Go through the Message from reader & Mail from HDFC. Also read what others have to say on Bancassureance Nexus including IRDA Committee.

Message that I got from the reader:

I appreciate the time and energy you spend in the financial education. Two weeks of going through the site encouraged me to walk into banks to open SIPs.

When I walked into HDFC for the last two SIPs, the Relationship manager tried to convince me for ULIPs. I wasn’t convinced then so I asked him to send me some explanation. The reply is appended below. At the outset, for long term the ULIP capital left after charges seen to be a lot compared to MF. Not sure what I am missing here. Basically the contention was that for ulips, the 1st, 2nd and 3rd year charges are 40 %, 15 % and 10 %. Thereafter it remains at 2 % of annual premiums where as in MF it si 2.25 % of the total corpus every year as maintenance charges. So if you were to invest Rs 100 every year for 30 years, for ulips you pay Rs. 119 as total maintenance charges and for MF you pay Rs.1046.25 at the end of 30 years. He said something about the fund charges for ULIPs being capped at 3 %. Has the ULIP policies changed since your articles on ULIPs ? Hope you could provide guidance

Banks are mis-selling

Mail that he got from HDFC

It is Shocking that he got this mail from HDFC Life Insurance but he is client of HDFC Bank. (CC in this mail was marked to HDFC Bank employee)

HDFC Email

Further to our discussion please find the bullet points .

1. Long Term Perspective: The Fund Manager cannot have a long term perspective as MF are highly liquid. Whereas ULIPs are long Term in nature with a mandatory 5 year lock in period. Hence they have the better probability of generating better returns in the long term. Longer the money is invested more the returns.

2. Liquidity pressure: MF being highly liquid in nature AMC has to set aside a significant portion of money in liquid assets which are low generating Income avenues. Whereas ULIPs strictly invests as per the Fund opted and can afford to invest in Long Term Investment Avenues.

3. Retail Participation: In MF Institutional Investors also participate in the same fund. They always have the edge over any retail investor in terms research and analysis. Hence can influence the NAV as they invest in huge amount.

4. Fund Manager: The investment for AMC is being managed by individual Fund Managers ,Hence it solely depends on one person thinking who also happens to earn his reputation and earnings from the Fund Performance. Whereas in ULIPs there is a Committee comprising of Deepak S Parekh ,Chairman, Keki M Mistry and AK T Chari -Independent Director, Amitabh Choudhury-MD and CEO, Paresh Parasnis-Executive Director and COO,Vibha Padalkar- Chief Financial Officer,Srinivas-Appointed Actuary, Prasun Gajri- Chief investment Officer. The entry of exit of one person doesn’t effect the long term strategy of Fund Management unlike AMC.

5. Fund Management Charges: The charge is deducted while calculating the NAV .The average FMC ranges from 1.5-2.25% of the fund. The newer funds have higher fmc and the older funds have relatively less. Please find the impact of such charges over a long period of time. Also comparison with the charges deducted from the premium .Currently the Initial Allocation Charge is 4%,3%,3%,2%,2% for CREST- Free Asset Allocation and 1st and 2nd year -7.5% 3rd to 5th year is 5% and 6+ year is 0%.

Whereas in ULIP the charges are highly regulated and is capped at 3% over a 10 years and 2.75% for a period more than 10 years excluding the mortality charges.

6. Fund Options and Tax implications: The flexibility to invest in 5 fund options ranging from -100% Money Market Instruments to 100% Equity and various combinations of Debt and Equity .Fund switches can be easily done online .The maturity amount in ULIP is tax free irrespective of Debt+Equity Composition whereas in MF only equity investments for more than one year is tax free.

7. Fund Performance HDFC LIFE ULIP Products lease find the fund performance of all funds launched since inception of the company against the benchmark . Also attached in the zip file of the oldest 100% Equity Fund -Growth Fund with the portfolio details .(16% over a period of 7 years till year end 31st Jan 2012)

8. MF Fund performance over a period of 5 years till year end 13th Feb 2012. -Refer to OLM-50(Out look Money -7th march 2012).

Equity large Cap:
Min : Franklin India Index Nifty 5.65%
Max: UTI Opportunities 15.09%

SATELLITE:
Min : IDFC Imperial Equity -A 8.53%
Max: UTI Dividend Yield 14.95%

Equity- Mid Cap and Small Cap
Min: GS Junior BeES 8.16%
Max: Birla Sun Life Dividen Yield Plus 15.17%

9. Insurance Charges: Insurance Charges in the Term Assurance is paid in equivalent instalments over the entire period ie higher charges are recovered in the earlier part of the year and lesser is recovered in the later period of the contract period. Whereas in ULIPs risk charges increases with age and you pay as and when risk increases. A 10 times coverage also ensure ur financial objective is achieved even in case of any unfortunate event -A small protection against the targeted maturity amount.

Sky is not the limit in mis-selling…

Can someone write such a long message to sell one insurance policy or this is a copy paste which is going to lot of people??

I would not like to comment on the mail but would like to share – what others have to say:

Monika Halan, Editor Mint Money (Hindustan Times) recently wrote an article – Should Banks sell Insurance at all?

She wrote “With banks mis-selling and not taking responsibility, and RBI unwilling to take the brokerage route, why sell insurance at all?”

Article also quotes one point from published report – bancassurance draft guidelines by IRDA committee.

The committee worries about the unequal relationship between banks and insurance companies and it says: “The insurer ends up paying a fat upfront fee running into tens of crores, at least one-fourth of the prospective business, training costs, infrastructure costs to the bank brochures, expenses towards the transactions, incentives, travel, entertainment for the bank staff are some of the heads under which the insurer is fleeced. The accounts at both ends are opaque and the payouts exceed the prescribed commission by a large measure.”

It is interesting to note that what Deepak Satwalekar(retired CEO of HDFC Standard Life Insurance Co.) have to say.

“…as stated by the IBA (Indian Banks’ Association) representative, the banks are unwilling to assume any responsibility, or risk, of the result of their mis-selling. RBI is also wary of banks taking on the role of a ‘broker’ as it would mean that they assume the role of a ‘principal’ in the sales process with the consequential responsibility and potential risk. Possibly the banks are better aware of the deficiency in the sales process practices by them and hence their reluctance to assume any risk.”

Recently an article from employee of Goldman Sachs is making buzz – this shows conflict of interest between bankers & client is same across the globe. You can read that article here – Why I am leaving Goldman Sachs

To put the problem in the simplest terms, the interests of the client continue to be sidelined in the way the firm operates and thinks about making money. Goldman Sachs is one of the world’s largest and most important investment banks and it is too integral to global finance to continue to act this way. The firm has veered so far from the place I joined right out of college that I can no longer in good conscience say that I identify with what it stands for.

He further adds – What are three quick ways to become a leader in Goldman Sachs?

a) Execute on the firm’s “axes,” which is Goldman-speak for persuading your clients to invest in the stocks or other products that we are trying to get rid of because they are not seen as having a lot of potential profit.

b) “Hunt Elephants.” In English: get your clients — some of whom are sophisticated, and some of whom aren’t — to trade whatever will bring the biggest profit to Goldman. Call me old-fashioned, but I don’t like selling my clients a product that is wrong for them.

c) Find yourself sitting in a seat where your job is to trade any illiquid, opaque product with a three-letter acronym.

But we can’t always blame the seller. Bemoneyaware wrote an interesting article – It’s Mis-Selling or Mis-Buying: It’s My Money, My Responsibility

There is a quote in Hindi Chahe chakko tarbooz pe pade ya tarbooz chaooke pein par katda to tarbooz hi hai (If knife falls on water-melon or water-melon falls on knife it’s the water-melon that will get cut).  As it is your hard-earned money you have to take responsibility for a fool and his money is soon parted. Do you think products are mis-sold or mis bought? Is it only insurance products or ULIPS but others too? Do you think we need to take responsibility for our actions ?

Also read our earlier articles on the same issue:

If you have ever faced a similar situation– must share it in comment section, it may be of great help to other readers.

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{ 23 comments… add one }
  • Shinoj Jose March 16, 2012, 5:39 PM

    My brother is an NRI and he has an account with HDFC in India. Recently he got a courier from the bank which contained documents for some data updation. They cleverly inserted ULIP application form in between. As my brother got confused, he contacted the bank. They explained that it was a mandatory form which is required so that he will get “better returns”. Then luckily he asked me before signing and sending them.
    See how cunning these people are.

  • anil kumar koul March 16, 2012, 9:45 PM

    recently i got lot of enquiries from known people who wished to invest in hdfc
    crest – i was forced to analyis the scheme & trailing mail is the content i forwarded to my well-known people. the height of mis-selling is that they were told that Rs 15=is the assured part after 5 years for every unit of Rs 10= invested at inception.i wish to share my observations-may be not so profissional with TFL readers.
    anil koul
    Dear abc sahib,thks for giving me the chance for going through the product features of HDFC SL CREST PLAN,let me explain my finding”s as under:-
    it is the unit linked plan which will invest in stocks ( 0 to 100%) or debt schemes( 0 to 100)% depending upon market conditions & to ensure higest NAV guarantee.
    Higest NAV or RS.15 NAV per unit during 0 to Ist. 7 years can be availed only on maturity date which is 10 years from date of investment.
    Precisely if we purchase a unit @ Rs 10= today-we will get assured RS.15 for that unit on maturity i.e, 10 years-simple calculation makes it a return of app 5% P.A.( CAGR)-future units will be purchased at different rates-so little relevence.
    Now what makes it different from M.F.schemes is only charges levied.
    the charges under this scheme will be as under……
    1)premium allociation charges:- 4%—ist & iind year & 3% iird.year & 2% 4&5 th. year which means if we invest 100000 we will get units worth 96000 in ist.& iind.year( comission to agents)
    2)Fund management charges:- 1.35% P.A means RS 1300 on 96k -bal…Rs94700=( can be higher if fund value increases since it will be deducted on daily basis on fund value)
    3)Policy admistrative charges:-0.31% per month means 3.72% P.A means RS.3522= ON 94700-bal remaining Rs.91178=
    4)investment guarantee charges 0.5% P.A. means RS.456= P.A ,BAL remaing Rs.90722=
    5) let me leave service request charges which is RS.250= per request—-no change-let us assume we will not request for any service.
    6)mortality charges – which is RS.7.5691= per thousand per year for ur age i.e 54 which works out to be RS. 3785= per annum for 5 lakhs insurance & this charges will go up with increase of age ..bal 90722-3785=RS.86937=
    7)service tax & edu.cess on 13000 @ 10.3% =1339, amount remaing RS.85598=
    8) IF U need to surrender policy -you will be penalised by charges @6% for first year & less after or RS.6000=(which-ever is less)
    so precisely RS. 85000 will be left & units will be allotted @ RS.10 WHICH is assured to be RS.15=on maturity.
    Now how does this plan works:- at inception of policy till 1 to 3 years fund manager will invest heavily in equities & if market is bullish he will start shifting to debt useing assest allociation model between equity & debt & will shift equity to debt with passage of time & if market crashes in intial years -he will just switch over to debt 100% till already touched nav is reached through interest- precisely assured nav plans can never give better returns.
    am attaching the brochure & mortality charges chart of SCHEME .
    i have a lot to write for such schemes –but i would conclude that these plans are best for sellers & worst for investers -hence “sar juka ka jiyo”
    in a ligher side let me offer that we are brokers of all life & general insurance companies & if you take this plan through us for just 1 lakh of rupees -we will never charge any fee for any sevice.
    lastly i have made rough calcauations above just to make things simple & easy to understand-actually all charges will de deducted on daily basis useing complex calcuations-so above calcuations may vary little-but then essence is same.
    pl. corelate all above mentioned charges in page no.5 of co.brochure attached herewith
    pl. feel free for any clearfication or doubt.

    2 attachments — Download all attachments
    HDFC SL CREST. pdf
    sar juka ka jiyo-mortality charges. pdf

    • ANIL KUMAR KAPILA March 17, 2012, 7:32 AM

      I found it very interesting.

    • anand Kumar March 18, 2012, 1:07 PM

      Hi Anil,

      Thanks for writing and sharing …

      Recently i visited HDFC bank Vidyaranyapura, Banglore branch.I thought of investing money in Fixed deposit for one year on my fathers name. But the Bank employees ( agents) are made us so confused and told CREST policy is good. And they showed some calculation on ExceI sheet and told you will get this many lakhs of money after’N’ years . I told i am not intrested in such policies. And the gretesst fun is the agent told he also invested in this policy 🙂 that is the reason he is suggesting me too invest…:))). I regulary read articles in TFL . I have some knowledge on ULIPS ..thank you all for sharing and writing . You guys are doing great job .

      Thanks,
      Anand

    • ASHWANI March 30, 2012, 10:17 AM

      Good Analysis…… Mr. Koul….. bad jaan article…..

  • ANIL KUMAR KAPILA March 17, 2012, 7:21 AM

    Hi Hemant
    What is your take on Rajiv Gandhi Equity Scheme announced in the budget?Will it be Direct Equity Scheme Or Mutual Fund Scheme like ELSS?

    • Hemant Beniwal March 17, 2012, 7:29 AM

      Hi Anil,
      I am not sure but this should be some special pooled investment focusing on SME stock exchange. (I am not confusing it with new capital gain tax scheme)

  • raghavendra shenoy March 17, 2012, 11:23 AM

    Excellent writeup, detailing the con-job!

    Would be relevant to look into the recent bancassurance tieups – between PSU banks and insurance cos. It is common knowledge that branch managers are awarded trips to locales like Thailand, Malaysia, Singapore etc on reaching the targeted AUM by the insurance co. Sad part is that, x number of innocent customers actually pay for the trip 🙁

    I am an HDFC Bank customer, and have a request for locker pending for the last 6 months pending. Recently visited the home branch in Pune for address updation purpose. After the address updation formalities, the executive asked me if my tax planning for the year was done. When i replied positively, he started detailing the virtues of a child plan, and said that this would give better returns than Mutual Funds. When i sought to discuss the cost factor, his view was that this would cost less than MFs. What’s more, he went ahead and said i will give you a quotation and handed over a neatly typed quotation, for an annual premium of INR 100,000 ( yes, ONE LAKH rupees). He also pushed an ECS form and asked me to sign on it, saying he would fill in other details. The executive said that this was the most convenient way of investing, since i would not even have to remember the premium pay by date – the amount would get deducted from my a/c directly. I was in no mood to buy the plan and tried to wriggle out saying that i do not want to use the HDFC A/c for premium payments. Promptly, he informed me that he could wait for my cheque and would call in for the same. For the next 3 weeks, he called almost every second day and when he found that i wasn’t yielding, he said..”Sir, ye plan aap le lo. Aapka locker wala kaam mei kar dunga”.

    Shocking, but true.

  • tony gomes March 17, 2012, 12:10 PM

    hi Hemant ji,
    Went to India in February for a short stay.
    Before leaving I happened to read a spam mail from Policy bazaar.com,
    they offered insurance policy from all insurance company available in India, just to see how much premium was required I tried to use their premium calculator.
    There was an innocent looking blank which they needed to fill to use their calculator and that was mobile number, and that was when my suffering started.
    Each day I received X number of calls from representative asking to fix a meeting, which I did. Once I called two representative from different company to discuss Term policy.
    But what I found out was that no one was interested in what I was looking for,
    Instead they were busy trying to sell me different product,
    and they were so much into explaining to me I was almost convinced in buying their product which offered everything the company wanted except nothing for me in return just a 5% maximum in 10 years.
    But thanks to you and your site, I could see through them and the real reason.
    All my best wishes to you, and expecting an article on Rajiv Gandhi Equity Scheme.
    Regards
    tony

  • Shinu March 18, 2012, 3:38 PM

    The best part is they never mention their own MF’s – HDFC Top 200, Balanced, Prudance or Equity which are the informed investor favorites…

  • Deepak R Khemani March 20, 2012, 12:26 PM

    Moneylife has written an article on the Mis selling issue – Mis-selling: How savers are mis-lead
    Below is the comment I have written on that and I reproduce it,
    Mis-selling or Mis-buying that is the first question, anyway Mis-selling happens throughout the world in every country, developed or developing, in India the problem is particularly acute, Every Indian trusts his/her Banker blindly, and buys whatever he/she has recommended without even blinking an eye, what he has been promised is a higher return than the Bank FD!
    My friends, ex bankers tell me that when a banker changes jobs the question he is asked how many of the other banks’ clients will he get to the new bank and what will be the size of his assets which he can transfer, then only will he get the job, fat salaries and perks are promised on unbelievable targets, no wonder mis-selling is rampant in private banks and now PSU banks seem to be taking the cue.
    In other cases rebating is a cause of Mis-selling, Most clients want something back when they pay a premium! This problem cannot be eliminated totally, financial literacy as is being done by Moneylife is the only way ahead.

  • Kirti March 21, 2012, 10:24 AM

    Thanks for including our article.
    The issue of mis-selling by the bank breeches the trust between consumer and bank officials. People don’t realize how bank official are sacrificing them for meeting their personal targets.
    Last week there was an article by Greg Smith on
    Why I Am Leaving Goldman Sachs!
    Quoting from the article
    To put the problem in the simplest terms, the interests of the client continue to be sidelined in the way the firm operates and thinks about making money.

    Misselling by bank needs to be raised as much as possible and forums like tflguide are doing a great job!.

  • Manikaran Singal March 21, 2012, 7:42 PM

    Hemant, i loved point no. 4 of HDFC Email
    “Fund Manager: The investment for AMC is being managed by individual Fund Managers ,Hence it solely depends on one person thinking who also happens to earn his reputation and earnings from the Fund Performance. Whereas in ULIPs there is a Committee comprising of Deepak S Parekh ,Chairman, Keki M Mistry and AK T Chari -Independent Director, Amitabh Choudhury-MD and CEO, Paresh Parasnis-Executive Director and COO,Vibha Padalkar- Chief Financial Officer,Srinivas-Appointed Actuary, Prasun Gajri- Chief investment Officer. The entry of exit of one person doesn’t effect the long term strategy of Fund Management unlike AMC.”
    LOL……this is actually heights of mis-selling. Had this been the case , i would have loved to advise all my clients to invest in the ULIPs being managed by Mr. Deepak parekh.

  • Vijay March 22, 2012, 1:58 PM

    I had been working for a Private bank for over 2 years as a Relationship manager and had to resign only for the reason that I was forced to sell Life insurance to my clients. My mind and sole never permit me to pulp out people who made the money the hard way. Once this money leaves their savings bank account to some insurance it gets stuck there, with the only option to commit suicide to at-least benefit his nominee.

    I have compared many companies’ insurance products and every time end up believing that the best option is to take a Fixed deposit or NSC with post office along with term plan for the life cover. If willing to take Risk MFs is also an option.

    My bank always made us sell the traditional insurance product. The reason is simple; the private insurance company whose product we sold gave the bank around 20% to even more than 70% of the first year’s premium. Traditional plans are a trap. Even some came out saying 210% return. “Return when?” is the question you should ask. I can assure you the return would be after atleast after 20 years. The NSC would double the money in 8.5years. With 9.25% interest in Fixed deposit your money will double in 7-8 years. But sure insurance sellers would claim interest on Fixed deposit attract tax. But let us all remind our self that in every banks there is scheme for 5 years FD which can be given for tax exemptions u/s 80c and tax gets attracted only if the interest goes beyond Rs10000 a year. Surely no one has to tell us how to put or FDs in check.

    If the life cover is concern, go for a term plan. Some Rs 6500 per year could get you a cover around Rs 25 lakhs for a term of 20 years even for a chain smoker. This would be almost equal to the charges you pay if it would have been a Life Insurance.

    • Umesh March 30, 2012, 2:19 PM

      Hi Vijay
      Please refer to your comment – “But let us all remind our self that in every banks there is scheme for 5 years FD which can be given for tax exemptions u/s 80c and tax gets attracted only if the interest goes beyond Rs10000 a year”

      It is right that you get an exemption u/s 80C for 5 year Tax Saver FD but the interest on FD is not tax free, the limit is zero. It is only the TDS that will not be charged upto 10K per year. No TDS doesn’t mean it is tax free.

      • Vijay March 31, 2012, 11:41 AM

        Fairly true Umesh…
        Even in that case, FDs generally fetch you an interest of 9 t0 10 %. Which means even if we get the maximum Tax rates applied which is 30%, we still gain over 6% as interest.

        I don’t know even one insurance policy that had given out atleast 5% over the last 3 years.

        But NSC is a better option. NSC interest is also taxable. But, the same can be claimed as deduction under section 80 C.

        Unfortunate for us, if we apply inflation to these figures… nothing would help from loosing your money over time

  • N.M.R.Shreedhar March 23, 2012, 7:53 PM

    Great article, Hemant. Totally agree with you that Banks should not be allowed to sell insurance products– I would include even MF schemes. Recently I had been to Axis bank, Pune branch–had areal tough time sayin NO to a guy selling a ULIP scheme from Max New York Life— infact most banks are using their office space to sell such schemes, be it HDFC bank or Axis bank or ICICI bank. High time IRDA or SEBI steps in and bans these agents from operating in bank premises–the issue here is when the bank official where you have your account also speaks the same language as the insurance agent, you tend to believe the agent. The only way out is to increase the financial awareness of the people thru websites like TFL.

    • Vijay March 31, 2012, 11:56 AM

      Unfortunately IRDA accept these agents in Bank and even have a nickname for them as Bank-assurance Agents. Even Banks like Canara Bank is pushing insurance and MF aggressively,

      TFL is a wonderful option. But I believe word of mouth is better one. You know the cheating habits of the banks. You can spread it to your near and dear and ask them to spread.

  • kazim ali March 26, 2012, 6:42 PM

    Hello Hemant sir u r doing excellent job of awakening we indians in financial planning and management may god bless u i have a small query i have invested in LICs jivan saral policy in the year march 2009 .similarly i have taken one more endowment policy from PLI in the year 2011.After reading ur post and articles i was shocked to learn that i m duped by these agents for their own benefit.kindly suggest me how to exit from these policies without loosing much.comment upon these policies as i have taken both policies for a period of 10 long years.sincerely waitng for ur reply.

  • anil kumar koul March 29, 2012, 9:47 AM

    Dear kazim ji,yes jeeven saral is a flexable endowment plan in which you can reduce the premium considerably after compilation of first 3 years,i.e,min.Rs 250=
    per month(if under age 49 & Rs.400 p.m after 49 age) for next 7 years & after that u can fully withdraw with loyality benifits -whatsoever it may be.now regarding PLI endowment plan surrender-pl. note that surrender of any endowment plan of any co. after first year -the amt.payable is nil & after 3 years premium paid only 30% of paid amt-minus first year prm is the surrender value.
    do take informed dicisions.

  • Kinshuk Chandra October 28, 2012, 10:30 PM

    Hi Hemant,
    Thanks for publishing this article. I am also a victim of misselling….:(

    I have put in 2 premiums of 50k in Hdfc Crest. Now 3 premiums are still left. What should I do? Should I quit or should I put in 3 premiums as well?

    My age is 25. Please guide me here.

  • Binson Mathew October 28, 2013, 3:23 AM

    Worked as a Wealth Relationship Manager for a good time, and i know what we sell and how we sell….. Humble request to all readers… Trust me, every words which are written in this article is true to the core and everyone should keep themselves away from so called relationship & wealth managers….

    Even, the MF suggested by bank is also having their own story! All RMs says, we have a research team, and they do market research and recommend funds to the bank clients… After my six years with banks, i realized the research what bank does it calling up the AMC and negotiating for the Brokerage! Whichever schemes offer the best, thats the best fund to invest! The reason why, i have written is…at my RM tenure, whatever funds bank recommended, 90% of the funds have not seen double digit returns at any point of time.

    Stay tuned to TFL and Mr. Hemant, God bless you for safe-guarding the hard earned money of many readers…

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