“Insuring” yourself against misselling

Financial advisors often castigate insurance companies for designing products which are expensive (such as Unit Linked Insurance Plans or ULIPs) and opaque (Traditional Plans such as Endowment and Money Back Plans). This incessant barrage has galvanised the Regulator (IRDA) to make certain policies more “investor” friendly but it is yet unable to plug last-mile loopholes which occur in the form of sharp selling practices.  Continue reading

Structured Products next?

ULIPs will cease to be very attractive for distributors from September 1, 2010 considering the new guidelines. In the past we have seen that whenever one vehicle becomes unattractive to distributors they immediately latch on to another vehicle. We have seen this in the mutual fund space where investments would be churned out of an existing scheme and re-routed to a new fund offer to get the upfront commissions. Later when entry loads were abolished on mutual funds we saw investments shifting to ULIPs.

Now that ULIP commissions have been reduced and lock-in period increased, one could see distributors shifting focus to Structured Products in the form of equity linked debentures. Structured Products are products which do not fall directly within the purview of either RBI or SEBI. The margins to the distributors are also opaque to the investor. In short, all the ingredients for increased volumes are there!

Where the package is the value, ULIPs vs. Mutual Funds

There are many products in the world where the label or the packaging is what imparts value. The product in itself constitutes a fraction of the overall value derived by the consumer.

Take for example a Rolex watch, a Louis Vitton bag or an expensive bottle of wine. It is what the consumer percieves that is important as opposed to what is rational. If consumers were rational, they would probably be willing to pay only a fraction of the current price.

The case of Unit Linked Insurance Plans (ULIPs) vs. Mutual Funds is similar. While the former is an expensive vehicle to invest through, the latter is the best value rationally. However ironically it may be the case that investors derive more “satisfaction” in ULIPs as compared to Mutual Funds. The Mutual Funds do not promise a child’s education or a comfortable retirement or the highest NAV. Also due to the fact that most funds are open ended and periodically ranked according to short term performance, it encourages short term behaviour in distributors and investors. Hence the entire focus of investors is diverted from long term investment returns from Mutual Funds to short term volatility of the markets.

What is probably needed in Mutual Funds is a move towards interval schemes with Systematic Investment Plans and a defined investment horizon. These schemes would have an asset allocation which would be determined based on the target retirement date or the target education goals (the defined investment horizon). The investor would be assured that a systematic asset allocation will take away undue volatility and help in meeting life stage financial goals and at the same time benefit from the low cost structure of Mutual Funds.

It is probably a time for Mutual Funds and the regulators to understand the art of packaging!