THE TIMES OF INDIA, BENGALURUMONDAY, FEBRUARY 2, 201516 TIMES PERSONAL FINANCE

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Don’t blame the seller for the mis-selling

We have allowed a small bunch of reluctant crooks to make the financial services space a haven for lies

Uma Shashikant

It is the placement season at manage-ment schools. Every year I see stu-dents refusing “sales” jobs and aspir-ing to become treasury managers, fund managers, research analysts

and credit specialists. Then reality sinks in. A bank or an institution would need only a few analysts, but need a few hun-dred relationship managers. Students soon pick up these jobs, hoping to get out quickly. Thus, enrolment into the armies of people selling financial products is not by design, but by default.

Independent financial advisers like to think that they made a career choice, when they graduated from insurance agents and ex-bank employees, to sellers of exotic financial products. Even clerks who sell new issues with broking firms move up sometime, to sell derivative structures and PMS products. Remind them of their days of being “agents” and they sulk. They do not like to be called agents or distributors, but advisers.

Selling and distribution are very im-portant functions. From the newspaper vendor to the seller of shampoo sachets in villages, each one makes it possible for products to reach the final consumer. It is only in the financial services indus-try that sellers seem to loathe what they do, even if they love the money they get.

Sellers love to meet people; they are great at making people feel important; they love travel; and they enjoy their suc-cesses boisterously so that they can take failures on their chin. It is one of those professions where being turned away or put down is commonplace. That is why training programmes for sellers are all about motivation. Speakers at these ses-sions tell sellers how important they are to the supply chain. Producers incentiv-ise sellers on the basis of performance. What the financial services business needs is an acceptance by regulators and policy makers of the need for sellers.

Insurance is perhaps the only excep-tion where sellers are treated like sellers. Banks have direct selling agents. Brok-ing houses have sellers and distributors, set up as sub-brokers. There are also relationship managers selling accounts. The mutual fund industry is tied up in knots when it comes to selling and dis-tribution. A clutch of distributors hold the industry to ransom, as it struggles to expand distribution and pay.

The first problem in financial prod-uct distribution is that we fail to sepa-rate selling from advice. A seller is not a fiduciary, he is a commission agent. He works for the producer and will operate with selling skills, and a small reposi-tory of knowledge. An adviser is a fidu-ciary, he has to operate in the interest of the investor. He works with a larger re-pository of knowledge. In the last few years of sensationalism about mis-sell-ing, we have painted sellers in black and forced them to become advisers. The

sparrows shall not become eagles.The second problem is that we are

adamant that the investor should pay the adviser. Behavioural scientists have pointed out that this is not likely to hap-pen. People do not treat direct payments from their pockets in the same way as indirect payment on their behalf. There-fore there is no monetary incentive today to graduate from a distributor to an ad-viser. The design is conceptually wrong. We need advisers to grow in numbers and thrive, so the investor is not exposed only to sellers. The third problem is that we fail to see product design and product information as critical in investor pro-tection. A bank deposit does not need sellers. There are good and bad banks, and there are cheats who mobilise de-posits. We address the “mis-selling” in this segment by creating awareness about fraudsters, and allowing players to build reputation for products and services and promoting themselves through advertising. In insurance and mutual funds, we have poor products and restrictive promotion. In government schemes and NPS, we have good prod-ucts, but no distribution. By throttling distribution and failing to work on a use-ful design for products and advice, we have allowed a bunch of reluctant crooks to make the financial products and serv-ices space a haven of lies.

Financial literacy is not the answer. Literacy is empowering when it helps check frauds, ensure credibility and un-derstand rights and responsibility. The eco-system for financial products has to be designed to include sellers. Not to ban-ish them into shame, or assume that they will work for investors instead of pro-ducers. The challenge in achieving this lies in the product design and its com-munication. The responsibility for re-ducing mis-selling is therefore with the regulators and the producers.

The author is Managing Director, Cen-tre for Investment Education andLearning

Sanjay Kumar Singh

Inflation may be down but a major expense of the average Indian household is growing at a fast clip. The cost of higher education is already high and rising at 10-12%

a year. Children’s education is one of the biggest cash outflows that families must plan for. A four-year engineering course costs roughly ̀ 6 lakh right now. In six years, the cost is likely to touch `12 lakh. By 2027, it would cost ̀ 24 lakh to get an engineering degree.

Lifestyle inflation, too, has affected the cost of children’s education. “As your standard of living rises, it affects the decision about where you send your children for higher education,” says Vishal Dhawan, chief financial plan-ner, Plan Ahead Wealth Advisors.

The question worrying Indian par-ents is: will they be able to fund their children’s higher education? They can, if they plan ahead and take the right steps. We look at the challenges parents face while saving for their child’s edu-cation and how they can be overcome.

Be an early birdOne obvious solution is to start saving early. The individual will not only be able to amass a larger sum, but the money will also gain from the power of

compounding. A corpus of ̀ 1 crore may seem daunting, but it’s possible to save this amount with an SIP of `9,000 for 18 years in an equity fund that gives a 15% return. “Since the rate of educa-tion inflation is so high, you need com-pounding to work for you over a longer period,” says Vidya Bala, Head of Re-search at Fundsindia.com.

A delayed start not only yields a smaller corpus but can also jeopardise other financial goals. If you start in-vesting for your child’s education in your 40s, you are likely to fall short of the required amount. Often, parents dip into their retirement savings to fill the gap, but this can be a risky move.

Choose the right option Parents must also invest right to get optimum resturns. Equity mutual funds, for instance, have delivered aver-age annualised returns of 16.5% in the past 10 years. However, equity invest-ment is not everybody’s cup of tea. This year’s DSP BlackRock Investor Pulse survey shows that though Indians have a high propensity to save and invest, they still seek safety. Almost 52% of the 1,500 respondents said they wanted guaranteed returns from investments.

However, if you have 15-18 years left before your child starts college, equity funds should be the preferred invest-

ment for you. Over such a long period, the volatility in returns is flattened out. If you have the risk appetite, your al-location to equities can be as high as 75%. The balance 25-30% of the portfolio can be in safer options like the PPF, bank deposits and tax-free bonds.

Play it safe in the short termIf you have a time horizon of less than five years, you will have to rely primarily on fixed income instruments, which are likely to offer a lower rate of return. However, these offer guaranteed returns and safety of capital. In the short term, these factors become very important.

Review the portfolioOnce your portfolio is in place, you need to review it at least once a year. You should also check whether the amount required for meeting the goal has changed. “Education goal has two components: tuition fee and cost of liv-ing. Any of these could rise faster than anticipated. You need to find out wheth-er the 12% inflation rate that you have assumed is realistic,” says Dhawan.

Next, check whether your portfolio is on track to meet the goal. Bala sug-gests using step-up SIPs. “Raise the

How the crowd can fund your projectThanks to crowdfunding platforms, now you can approach a large group of people to finance your dream.

Premium allocation charge is deducted from the premium and covers the costs of marketing, distribution and initial manage-ment. It is usually high in initial two years.

Mortality charge is the charge for covering life and depends upon the gender and age of the insured and is charged on a monthly basis and is charged by cancelling units.

Find out where you stand and what you need to do; the eight retirement myths busted.

Policy administration charge is a fixed amount charged periodically, usually every month, by cancelling units.

Fund management charge is the charge for managing the fund in which the policy hold-er has invested and is adjusted every day in the NAV of the fund.

Switching charge is for switching between funds after the permitted free switches are exhausted.

SMART THINGS TO KNOW

Applicable charges for Ulips

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ICICI Prudential Long Term Fund's one year return has been the highest in the debt: income category

21%returns inpast 1 year

Equity: Large Cap 1 Year 3 Year 5 YearAxis Equity Fund 54.81 26.33 16.04

UTI Equity Fund 62.37 26.61 18.01

L&T Equity Fund 68.74 24.84 17.61

Equity: Large & Mid Cap

Kotak Select Focus Fund 77.94 30.36 19.05

SBI Magnum Multiplier 64.38 28.54 16.68

Mirae Asset India Opport. Fund 69.181 28.91 19.95

Equity: Multi Cap 1 Year 3 Year 5 YearFranklin India High Growth Co. 101.14 38.76 21.7

L&T India Value Fund 92.26 33.93 20

Principal Growth Fund 64.73 30.09 15.51

Equity: Tax Planning

Axis Long Term Equity Fund 83.49 36.54 25.21

ICICI Prudential R.I.G.H.T. Fund 82.88 36.78 24.76

Reliance Tax Saver Fund 110.37 36.62 22.98

Hybrid: Equity-Oriented 1 Year 3 Year 5 YearHDFC Balanced Fund 60.61 25.63 19.47

Tata Balanced Fund 62.98 27.37 18.37

Birla Sun Life 95 Fund 60.33 24.21 16.93

Debt: Income

ICICI Prudential Long Term 21.03 13.39 10.78

UTI Dynamic Bond Fund 15.9 11.19 —

Birla Sun Life Dynamic Bond 15.8 10.85 9.57

BESTFUNDS

TO BUYFigures are % returns. 3-year and 5-year returns are annualised. Source: Value Research

Neha Pandey Deoras

When Shubhashish approached banks for an education loan in 2013, he was offered strict condi-

tions. For a loan of `23 lakh, at 14.50%, he was asked to provide a collateral worth the same amount. The other offer was to take a loan of `7.5 lakh, at the same interest rate, but without a collateral. Nei-ther offers met Shubhashish’s needs. He required `23 lakh.

Shubhashish decided to try an unconventional route. He had close to 2,500 followers on Twitter and 600 friends on Facebook. He asked

them to help fund his studies. He promised to return their money in seven years at 8% interest. “I start-ed with a target to get 1,000 people to be a part of this exercise. I got seven investors on day one. I had 100 days to generate the funds,” he says. He was able to raise ̀ 11 lakh. “I put in `3 lakh, and my family pitched in with the rest,” he says.

Funding a venture by raising money from a large group of peo-ple is commonly known as crowd-funding. The act of raising money is known as crowdsourcing.

Crowdfunding can be an effec-tive way for generating funds to finance entrepreneurial ventures, social causes, higher studies, mu-

sic albums, publishing books or college projects. Here’s what you need to know.

Crowdfunding platformsIn India, the most popular way of securing crowdfunding is the re-wards or returns-based funding model. Rewards help attract do-nors’ attention. A rewards-based campaign may offer VIP access to events, signed merchandise, an interaction with celebrities, free download of a movie or music al-bum before it is launched, and similar incentives. “This model is suitable for raising between `5lakh and `30 lakh,” says Rinkesh Shah, Founder of www.ignitein-

tent.com, a crowdfunding plat-form. The platforms charge be-tween 7% and 12% of the funds raised as fee. Some may even charge a project initiation fee. Crowdfunding platforms also help fund seekers with marketing strat-egies, mentorship, consulting and legal advice. Anshulika Dubey, Co-founder and COO, www.wishberry.in, says, “Platforms give multiple options to donors to transfer funds—credit card, debit card, Net banking, etc. An individual can only give the option for Net bank-ing. Also, individuals do not have the credibility to raise funds out-side their family and friends.”

Things to keep in mindTo opt for crowdfunding, you need to know your project in and out. It is not easy to convince people to invest in you. “You can’t approach a platform or a funder just with an idea. You need a certain prepared-ness,” says Shah. You should be able to communicate the project plan, its completion time, the mon-ey required for it. You need to con-vey how you will develop the project and convince the funders

that you will be using the money productively. You need to be certain of the project’s delivery date.

Small investors may put in small amounts. Getting bigger sums from fewer investors is also difficult. You have to be prepared for the possibility of not being able to generate the necessary funds.

Who should stay away…Crowdfunding is better suited for raising funds for a one-time project. It is not viable as a long-term funding strategy. If you are looking to finance a long-term project, say a start-up, approaching angel investors or venture capital-ists may be a better idea.

What does the law say?Crowdfunding is governed by the Companies Act. Sebi brought out a consultation paper on crowdfund-ing regulations on 17 June 2014, and is still seeking an opinion on it. It has proposed that crowdfund-ing take place through Sebi-recog-nised platforms, including stock exchanges, depositories, technol-ogy incubators and associations of private equity or angel investors.

Best ways to invest for your child’s educationChildren’s education is an important financial goal for Indians

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Certicates give you an edge over peers.

amount invested in line with your salary increments,” she suggests.

If a fund is lagging, do not sell it immediately. Stop your SIP in that fund and start it in another better performing fund. Watch the perform-ance of the laggard for 3-4 quarters and only then decide to sell it. Rebal-ance your portfolio at the end of each year. Rebalancing essentially entails selling an outperforming asset and investing the proceeds in one that is underperforming. By doing so, you curtail the risk that your portfolio could face due to over-exposure to a particular asset class.

Approaching the goalThe investment process is never static.We have suggested equity funds for those with an investment horizon of over 12-15 years. However, five years before your goal, you should start shifting money out of equities to the safety of debt. Start a systematic transfer plan from your equity fund to a short-term debt fund (average maturity of 1-3 years).

Keep in mind that the date of your child’s admission to college is fixed. You can’t let a downturn in the stock markets jeopardise your child’s col-lege education.

IMA

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TYPES OF CROWDFUNDING

Investors are repaid their investment over a period of time—eitherjust the principleamount or with interest.

LENDING

Contributors donate funds just like they do to charities and other non-profit organisations/causes. This represents a small proportion of overall crowdfunding activity

DONATION

Investors receive a stake in the company. It follows a revenue-sharing model. Angel investors, private equity players and venture capitalists follow this model.

EQUITY

Investors receive a tangible item or service in return for their funds. Depending on the amount, different rewards could be offered—a ‘Thank You’ note, tokens of appreciation, contributor’s name on a project’s credits. Increasing number of movies are being financed this way.

REWARDS

INVESTMENT OPTIONS AVAILABLE

0 - 2 Y E A R S

3 - 6 Y E A R S

7 - 1 0 Y E A R S

1 1 - 1 4 Y E A R S

O V E R 1 5 Y E A R S

How much time you have will define your investments and asset allocation.

TIME

AVAILABLE

AGE OF

CHILD

INSTRUMENTS TO

CHOOSE FROM

COST OF

EDUCATION

INVESTMENT

REQUIRED

12-15 YEARS Diversified equity funds Low-cost Ulips Stocks

Medicalcourse to cost `38

lakh in 2030.

SIP of

`7,550in equity fund will grow to `38 lakh.

8-11 YEARS Diversified equity funds Equity-oriented balanced funds Debt-oriented balanced funds

Law degree to cost `9.3lakh in 2023.

SIP of

`6,300in balanced fund will

grow to `9.3 lakh.

4-7 YEARS Debt-oriented balanced funds Debt funds Recurring deposits

Engineeringcourse to cost `8.8

lakh in 2020.

Recurring deposit of

`11,600a month will grow

to `8.8 lakh.

LESS THAN 3 YEARS

Recurring deposits Debt funds MIP funds

MBA degree to cost `20

lakh in 2018.

SIP of

`48,500in debt fund will grow to `20 lakh.

OVER 15 YEARS

Diversified equity funds Low-cost Ulips Stocks

MBA degree to cost `75

lakh in 2033.

SIP of

`9,800in equity fund will grow to `75 lakh.

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