The other day I got an email from one of our readers saying: “I want to bring to your attention how bogus these online term insurance plans are. I have paid a premium of Rs 11,000 for a term insurance policy and agreed to medicals. After the tests they have increased my premium by 100 per cent, stating I have elevated high blood sugar levels. I know this is false, as I have undergone two medical tests, which didn’t show the elevated sugar levels. I have got a term insurance from another company recently and they have not said anything about blood sugar levels. Also, a month back, as part of company benefits, I got a complete health check, and all my parameters including fasting sugar levels are normal. I am a healthy 27-year-old male, with no smoking and occasional drinking — which I have declared. My monthly gross salary is Rs 2 lakh and I have a normal desk job in an IT park… Online term plans are nothing but a trick to pay for a reduced premium by then jacking up the price by 100 per cent claiming that the proposer has some medical issues which are false.”
We get many such emails every week. And not just about life insurers, but health insurers, stockbrokers, bankers and other financial services companies. Frustration and anger about regulators are common as well. Disputes between customers and companies are rife, and despite the presence of a regulator, customers are forced to walk away shortchanged. That sets you thinking. For computers and cellphones, we have Apple and Sony; for cars, we have Toyota and Mercedes-Benz. Why isn’t there an equivalent to these companies for retail financial products? This is a global phenomenon, but why? After all, financial products are not all new. In fact, it is the cellphone market that is only a few decades old, while financial markets are as old as the hills.
The fact is that durables are backed by science, and are constantly improving. One product may be different from another in features and price; but no matter what we select, we can expect them to perform. If they are defective, they can be replaced. This is because competition works. Financial products, in contrast, are not constantly improving. They are often backed by craft and commissions. Competition may not work. We simply cannot say that all of them work; in fact, most of them don’t. They are rarely replaceable. We trust the manufacturers of durables because of their reputation. The reputation of financial services companies is usually among the worst. And so, durables don’t need strong regulation.
The key difference between these two sets of products is that Apple, Sony and others sell tangible products that offer instant performance. We can see what we are buying, compare them physically — and even test them before we buy. Financial products are intangible, carrying only promises. Shop assistants (whose main income is a fixed salary) have a limited role in selling durables. They guide you to the right section, and explain the features of competing products. They cannot lie outright. Producers of financial services, brokers, agents and so-called relationship managers, who earn commissions on each sale, often play a major role in guiding you to the more harmful choices.
Finally, durables are a product of complex engineering, but you don’t need to know any of it to enjoy them. All financial products demand some technical knowledge to make the right choices. For all these reasons, financial products need close regulation; unregulated, they are a complete menace.
All these facts are unchangeable and explain why excellence in financial services is nearly impossible. Too many companies will design products that are complex, harmful, and sold with high-pressure tactics — after which the customer can run from pillar to post to have his problems redressed. Sounds too bleak and cynical? Well, the faster we wake up to this fact, the better for us.
And once we do wake up, what are the implications? One, you cannot really trust the producer or the distributor. Most of the complaints we receive have a familiar refrain: “But I trusted him… (bank manager, distributor, agent).” Two, brand names mean nothing. We know what happened to AIG in the US and (twice) to UTI in India. Three, both manufacturers and distributors may be unethical, working mainly for commissions. Even when they have your best interests at heart, they may be ignorant or incompetent or floating from one job to another.
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So, when it comes to buying financial products, clearly we have to do the hard work ourselves. But then most savers don’t have the time, interest and skill — and get gypped repeatedly. And after that, disgusted, they conclude that bank deposits, “money-back” insurance policies, and annuities are the safest products, if not the smartest, and thus serve their purpose fine. Meanwhile, mutual fund sales decline, as does the insurance business; stockbrokers have dwindling customers; and regulators wonder about their “developmental” role.
Hopefully, the smart people heading hundreds of financial services companies know what is wrong and where. But are they capable of changing anything?
The author is the editor of www.moneylife.in