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POSTED BY ON April 14, 2010 COMMENTS (59)
In my opinion we are going to see far-reaching long-term consequences once the SEBI-IRDA issue gets resolved for Financial Planning profession. I base my fact & assumptions that SEBI is on a strong wicket rather than IRDA. However we need to go to the origin of this situation. In this article we will see what exactly is happening at this moment between SEBI and IRDA over ULIP ban and whats its implication on financial planning . Also Read : A short guide to Hire a Good Financial Planner in India
What is SEBI & IRDA issue all about? How it actually originated?
The IRDA was formed before SEBI and with the help of IRDA insurance companies came out with a Jugaadu product called ULIP which is just identical to MF with one minor difference that apx.2-5% of a clients investment goes to provide a life cover and rest is invested in either market, Govt. Securities, corporate debt or Equity, depending on the mandate of that fund. Now the second part is nothing but just like a mutual fund scheme.
Where is the problem now?
There is no problem with it as 90% of insurance premium world over goes to market or securities. However, in India the ULIP products become terrible investment products because if one invests Rs.100 in a ULIP then 20% of your money goes into commissions and approx. 2% into insurance, only 78% of one’s money is invested in market or securities. So to get back to 98 ( 100 –2 ) it would take in normal market conditions at least 2 years in Equity oriented funds and 4 years in debt oriented funds. So all you are doing is just recovering your principal in next 2 to 4 years. Now, the miss-selling by an insurance agent gets hidden in the bull run and because of rampant financial illiteracy even among so called highly qualified professionals & corporate executives leave alone the advisor selling the ULIP, the investor is fooled into putting more money in these bull runs saying that your money will double in “x” years and in the bear runs when the ULIP loose even their principal, the advisor gives them a either long term talk or plays on the investor fear and switches them to another products. Hence, an advisor in India is the a true definition of an “opportunist”. In the bull run he plays on the “greed” of the investor and in the bear run he plays on the “fear” of the investor.
What the above does is that apart from loss to investors it gives an unfair advantage to insurance companies compared to mutual fund houses where commissions are in fraction of your investments. What is the incentive for an advisor or even big distributors like banks & distribution companies to sell MF schemes when they have the option of selling a similar scheme where they gets heavy commissions… as an agent what would you do go for Rs.20/- commission on ULIP or Rs.1 on Mutual Fund Scheme on an investors investment of Rs.100/-.
Now, taking stock of the above problem SEBI has gone for an eagle eye’s view of the whole problem and to create a level playing field among all market participants.After a lot of cajoling & convincing IRDA which failed to budge, SEBI issued the harsh step of issuing an quasi-judicial order restraining Insurance companies from offering ULIP without proper registration with SEBI.
What will happen now?
Though there is likely to be a stay on the SEBI order given the large number of clients who hold ULIP products by the high court. This can be a short-term breather to insurance companies but it is not a long-term solution.
Who is on strong wicket when the issue goes to Court – SEBI or IRDA?
Mr. Bave is a master strategist, he knew that the lobby of insures is very strong and united and it will take him years to bring them to negotiating table. With the powers conferred to him by parliament, he issued a quasi judicial order.
Now, quasi – judicial order is such that even Mr.Bave cannot revoke it. The IRDA may win a temporary relief in this war, but SEBI stands on a strong footings as in the court of law the court will go where investor interests remains. Insurance companies must see the larger picture and rather than worrying about loosing valuations post an unfavorable order, they must prepare them self to change with the times.
What are the implications of the SEBI & IRDA issue for Financial Planning profession?
So lets come back to the question what’s in it for Financial Planning profession ? In my opinion, realizing the investors interest the court will rule in favor of SEBI, post which Insurance companies will have to bring down the commissions to Mutual Fund level on ULIP’s.
Is this is a good news for Financial planners?
Yes, but how many of us are changing as fast as the opportunity provided by structural changes effected by such orders? Time & again it has been proved that great opportunity lies when you have big structural changes in an economy. Every century gives some opportunity during financial turmoil and this time we are in the midst of such an opportunity.
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What the SEBI is doing as the market is tumbling down for a long time and the investors are losing huge amount daily but nothing is being done by the SEBI to stabilise the market. If this pace of down trend goes on the SEBI may have to be closed and its officials have to be sent home.
Sathiyamurthi
There is nothing like that . The market movements are purely logical and obvious . These downfalls and upmoves are part of stock markets and have been their from centuries . Its the investor who has to take decision to buying or selling , there is nothing to be done by SEBI here .
Manish
“New Pension Scheme” Launched by Govt of India is very similar to ULIP. Will SEBI ban NPS also? Trouble for PFRDA ?!!!
Rajiv
Good point 🙂 . However it will not happen , There is no misselling happening in NPS at the moment , as far as i understand . Why do you think so ? what can be reasons to ban NPS ?
Manish
Finance Minister Pranab Mukherjee –> Swavalamban Pension Scheme –> R Gopalan, financial services secretary –> IRDA chairman J Hari Narayanan –> 1.4 million LIC agents in India –> Incentives to attract the unorganised workers to subscribe to the Swavalamban scheme –> Agents don’t understand the product / Less Transparency –> Mis-selling SEBI Ban ?!
Swavalamban Pension Scheme (NPS) is a major initiative of the UPA government. A Scheme for Common man.
Source :Rediff
Lifelong pension plan for unorganised sector workers soon
http://business.rediff.com/report/2010/apr/05/new-pension-plan-for-informal-sector-workers-soon.htm
Rajiv
Yea .. its under NPS . govt will pay 1k for each account for next 3 yrs .
Manish
Manish, little bit off-topic question. I follow your blog almost regularly, but have you ever written anything on health insurance? If yes, please tell me. I am in urgent need of buying a family floater policy for myself(42), my wife(40) and my daughter(6) for around Rs 4-5 lakhs. This will be a second one for me in addition to the family protection given by my company for Rs 3.00 lakhs from ICICI Lombard. Please advise which one is the best now from the following angle
a) claim settlement record
b) maximum no. of network hospitals
c) hassles free treatment for the policy holders.
Premium rate is not an issue. I am thinking about either Apollo Munich or Bajaj Allianz. Please give your valuable comments without any risk and responsibility at your end.
Thanks,
Purnendu Bagchi
Purnendu
you should do more study on apnainsurance.com . this is too much personalised suggestion 🙂
Manish
Manish,
in the article
“”What is SEBI & IRDA issue all about? How it actually originated?
The IRDA was formed before SEBI “”
so i wrote…i know this article is guest article….but as owner of the blog, how you overlooked this …surprise to me.
sri
Sri
I understand your point , but as its guest article i didnt wanted to modify it , also the news was around for some days so I assumed that its fine to skip the basic this time . I will take care from next time
Manish
manish,
are you sure IRDA has been established before SEBI..in my memory SEBI is there from 1995 and IRDA is a recent entrant in regulatory mechanism…say around 1999 or so..
second there is no ego war as portrayed….as IRDA knows very well that it is more of investment product and there is a report sitting for implementation to remove all entry loads…but still they want to fight for the industry sake as otherwise, many of the private insurance cos business will be lost…..
try to post the business profile of the private insurance cos and the insurance element in the ULIP….everybody will know…it is a matter of time the question will get answered.
Again the media was projecting there is a truce but immediately next day FM speaks in favor of moving towards no entry loads….what you can read….u have to simply read between the lines to know or you have to guess from what they have not said…
sri
Sri
Did i say that IRDA was established before SEBI ? where ?
Manish
Definately SEBI is on strong footings. In my opinion ULIPs product are more about investment planning than insurance consideration. As the premium minus commissions/insurance charge and other charges are invested in the market/ securities. Hence, these things must be under perview of SEBI, too for the benefit of the investors.
Bir
It should have happened long back when the products were designed and ready to come in market . not sure why it never happened to come under SEBI .
Manish
Appologies… read the above as
Just paid the 3rd year premiums this month.
Anu
Make sure you discard it only if you are not able to handle it well in long term , you have already paid most of the damage . Current IRDA & SEBI stuff wont affect the overall thing .
Manish
Hi Manish,
In the continuation of the above topic, if we are already paying the premium for 5 years, shouldnt we continue it for another 5-10 years to actually gain something from it.
The only thing that causes dilemma is when we compare the performance, MFs overshadow that of ULIPS by a big margin. Then it feels like throwing your money on a product which you already know will come second after the race is finished in 10 years.
Please can you also tell me where can i find the average returns of ULIP’s and where can i see the past performance of them (ULIP wise).
Thanks
Hitesh
Hitesh
Its not like that in general , if you use ULIP’s switching facility correctly(which is not easy and cant be done by 99% investors in ULIP), you can beat MF by good margin . Its the question of wheather its a right product of you or not , You should continue in ULIP if its YEs .
I have a huge amount of money put in ULIPs even before i knew what was it. Now that i know what it is waiting to complete 5 years to withdrew all the money in invest the same in MF. Just 3rd year premiums this month.
I wonder if i will get back atleast what i paid them. what do u think manish ?
Hi Manish
It is always nice to have varied articles by different experts. However as pointed out earlier the scope should be focused on how anything affects common man..
And in this case common man is hardly getting affected, if he is aleady holding ULIP. And if he plans to purchase better not to purchase as we have learnt term insurance plus mutual fund is better then ULIP 😉
Pavan
Yea .. Kept that in mind , thanks for your valuable feedback .
Manish
Dear Readers,
I am amazed at the feedback & at the expectations that followers of this blog has with Manish. I think Manish has raised the level very high….I have seen very few blog owners reply to articles on their sites except for one or two times, but here Manish make’s sure that he replies to all.
I thank readers who liked my article but I thank double to those readers who gave a genuine critical view like making it more relevant for customer point of view.
I do write some articles which are written from a end user / consumer point of view but in this case there is nothing much at this time, however in future I see the following two benefits :
1) The investor will benefit any ways b’cause what ever the regulatory jurisdiction the ULIP charges are going to come down & be at par with MF.
2) Because the incentive for an agent will not be there to sell ULIP, the unprofessional agent will get out of the market and a new breed of Financial Planners, will take over which will give u all disclosures & try managing you money in a risk – adjusted manner.This will in future will develop a mature market containing mature & informed advisers and thus… mature & informed investors.
What should a NEW investor do now?
You should not buy any ULIP existing or new and wait for charges to come down.
What Should an Old investor in ULIP do now?
Don’t panic, talk to a genuine Financial Planner. Your next premium must go after the court verdict which will make sure that all of your money will be invested in market.
If some unfavorable verdict comes your Financial Planner will be the best person to guide.
Thanks & all the best.
Harbinder
Thanks for your comment here . I am sure readers will like more article for you in future . Regarding your comment on commissions coming down upto MF level . Do you really thing Swaroop commission recommendations will get implemented as they have suggested ? Dont you think upper hands will make sure that it just goes down the drain ?
Do you think that even after Ulip’s commissions come down , a normal investors who does have much ability to control the products like ULIP’s should get into it , after simplicity of financial life is also something if investors have reasonable targets of 10-12% , over long term ?
Manish
Manish
FM FOR ZERO-LOAD FOR ALL PRODUCTS
The insurance regulator is facing renewed pressure to move to a zero-load structure — where companies pay the commission instead of the burden falling on policyholders, as is the case at present.
“Sebi’s decision to make mutual fund advisors the agents of customers rather that of the company whose products they sell would go a long way in protecting small investors. I believe India could set global standards by following a no load plus fee model for the entire financial sector to ensure a fair deal for all market participants. I hope all financial sector regulators would work towards this goal,” Finance Minister Pranab Mukherjee said at the market regulator’s Foundation Day function on Monday evening.
Hemant
What is blocking point for swaroop commission recommendations to come in action ? Who is opposing it ? is it IRDA , i bet ?
Manish
hi manish
would investors in ulips get any money back if the court agrees to sebi and asks irda to change its stand on ulip trading and marketing practices
Raja
Nothing is happening to the old ULIP’s . SEBI has just banned companies to sell new policies thats all . Dont worry
Manish
To assume that IRDA has won temporarily is misconception. Problem has not been resolved, Finance Minister’s statement has only ended the deadlock, though his logic is not financial. Its like procastinating the doom, there will be bickerings for sure and it is bound to confuse investors, by investors I mean people who purchased policies (not those who understand SEBI or IRDA). It would have been better if FM has initiated the negotiations between SEBI and IRDA.
SS
I agree . IRDA and SEBI should get more mature (esp IRDA) .
Manish
How many investors really knew that SEBI has forbidden IRDA for new ULIPs? The moment they read newspapers they believed their money was lost forever! More than anything else this type of misunderstanding causes instability. A simple thing which could be resolved by reading rule book, issue has been transferred to court, to create even more chaos. Its not about finance only, its about control as well, a war of ego.
I got a call from ICICI customer care selling ULIP , and Its me who told them that please stop it , SEBI has issued the notice , the lady was so worried and went to check with his senior 🙂
Manish
Manish, i very much enjoyed reading this and the previous article on this blog. Please do post such news related to economy….. Especially the comment section was too good for the previous one. Please include such articles.
Anu
Yes i will . I am glad people are like it 🙂 . Partha’s comment in the earliar article was great .
manish
Many of my colleagues who purchased 2-3 ulip’s didn’t know about this issue till today. When I informed this news (ulip’s banning & revoking it) the first thing they got is skeptical about their investment.
Then some guys even argued that there is fault on SEBI also as why didn’t it was done a long time ago. Why it is doing now???
Praveen
I hope you didnt tell them that the old ulips are also revoked .if they dont know the exact thing , they will assume things . I would say SEBI was late in acting , however IRDA should be the real one who should be blamed .
manish
I would like to say that your blog is very bad, its addictive…..
When I read one article, I need to read the other & so on.
You must continue giving your views regarding all such topics related to finance. As from now on if I need to get any information on finance I switch in to your blog. From the day the news happened, I was checking your blog regularly to see your coverage on the topic. Its superb. I think you must continue writing such articles.
pratik
hehe .. I will take that compliment 🙂 .
Manish
Hi MAnish,
I totaly agree with your reply to Pattu. Since past 2-3 days i m continuously reading these issues, but was unble to conclude what will be the impact of these to common investor but yes your article helped me to understand it. I think yes we want this current issues to discussed so will also understand the Impact on financial plan. I dont thinks so you are deviating rather i would say you are diversifying this blog and its a good thing. Not evryone reads Newspapers and See Newschannels if at all they miss they can get on to this. Pls Manish continue doing it unless and until you dont have a knowledge of current issues how one can decide their products in Financial planning. Because of this forum we can ask our queries to you, we cann’t do same with News channels and News Paper. I request you pls continue it, it would be really helpful.
Rupali 🙂
Rupali
Thanks for your comments and feedback , I will be continuing doing so .
manish
Manish,
I am in full agreement with your article.
The need of the hour is to make the difference between ULIPs and MFs more meaningful and less symbolic. But as mentioned in your article if internationally the practice is to invest 80% of ULIP contributions in Equity/ Debt, why should we be different? If the balance is 20% is diverted towards insurance, it becomes more insurance oriented and differentiated from MFs. The only hitch is that the sum assured is presently restricted to 5 times the annual premium paid. This should be increased to 10 or more times to underline the character of insurance. This way it is also less susceptible to gross mis-selling. If the risk element is to be further lessened while maintaining the character of Insurance, it can be mandated to appropriate the premium after commissions to investing in Equity, Debt and Regular MFs. That way, I think, the benefits can be better insulated.
C M Vyas
Exactly , ULIP’s by design are excellent products , but the amount of insurance they cover is pathetic , Its first concern should be to cover the personal fully just like term insurance and then invest the rest of the amount in Equity + debt . This product can be very beautiful if done correctly . What do you say ?
Manish
Nice article.
Should have added more information on the effect this will have on common man (us).
We should have such articles just to broaden our horizon. strictly personal opinion though 🙂
Thanks
Hitesh
Hitesh
I agree , will take care of adding more info on common man from next time .
Manish
Hi manish , first of all sebi should educate the common man regarding entry load and why should you choose a advisor who charge you a fee. without this they are making new law as this is benefiting banks who are selling ulips like it is the best investment than fixed deposit, i myself is a witness for this, why cant bank concentrate on the core business, or any big distributor whose aum is big enough gives mutual fund free of cost as this effects the good advisor. now with the new fight with irda, sebi has not named Lic , i dont know why, as it is the only company whose advisor has mis-sold insurance product for the last 45 years, now if a new company has to make a mark, their agent has to do the same, as the common man is not educated, today if you meet a common man give the right advice , he would be shocked to learn abt the bad investment he had made, but still when it come to paying fees for professional advice , he would prefer the old agent who is not charging fees. how can we change the mind set, can sebi do something on this.
Geo Thomas
The only way out is awareness, it will happen slowly , to clear this mess of 50 yrs , one has to work for atleast 10 yrs to change the mindset .
hi manish,
I strongly feel that this article was indeed worth reading. But i feel your articles are better in the sense that you tend to view a particular problem in its entirety and express its ramifications on different sections of the society, be it on the advisors, financial institutions or the common man For example, in this particular article the columnist only touched upon the implications on financial planning. You would have elaborated further on its effect on the common man.
sudhakaran
Ok , from next time i will take care .
For now you have to understand that the impact of this on common man will not be much , the only thing is that investors will be in panic and confusion 🙂 . Its actually a ego war between IRDA and SEBI . thats my take .
Manish
Manish,
I don’t see the relevance of this article (and the previous one) to the common investor. These guest articles from CEOs of Financial planning firms (who seem to have some kind of hold on your blog these days!) are not very interesting to me. Judging by the drop in number of comments in recent articles I think I am not alone.
Articles written by you are much superior to these guest articles. I would prefer to wait for another one of yours instead of an uninteresting guest article from another CEO.
Hi Pattu,
I totally Agree. These issues are there all over the papers and the channels. Would wait for your next article on personal finance.
Abhishek
Pattu & Abhishek
Hmm.. I was trying to bring some diversification in topics and the material coming in the blog , after the latest survey where readers wanted more different kind of articles .
Apart from pure personal finance , I thought it would be good idea to give “news” related articles . Lets see how others react to this article and may be I can think about yours and Abhishek’s suggestion . Thanks for the comments you guys . I definetely do not want to deviate from the main focus 🙁 .
Lets see what are other’s views .
Manish
Manish
The issue of SEBI mandating insurance companies to fall in line has nothing to do with financial planning profession directly. A financial planner would be more vocal on this issue because he or she would see many positives (for the investor) in this move. I can understand your reader’s perspective becuase there is no usual thrill in this discussion.
For reasons best known to you, you have been advocating financial planning more than the financial planners themselves. If your readers do not like the views of financial planners, they are free to say so and you may also put restrictions. However, every DIYer needs a professional or a benevolent fan of financial planning like you to have constant irrigation of the information. Even the best of DIY websites globally such as investopedia.com or about.com have regular contributions from hard core professionals such as CFPs, CFAs and CPAs majorly. Congratulations; your readers worship you so much that they do not like to hear a second voice!
Regards,
Narendra
Narendra
Thanks for your comment , I just added this article so that we have different variety of articles. I am sure many people liked it . Its not correct to say that readers do not like second opinion . The readers here are very mature and like to challenge the views of others . Its was just “Pattu’s” comment which had a different view . Thanks for your appreciation .
Manish
Bringing the commissions on ULIP down to the level of Mfs.-
With 0 entry loads on Mfs the advisor has no option and is tempted to sell ULIPs which are not conducive for the wealth creation of the buyer. Yes, the costs have to come down in ULIPs and the insurance proportion should go up, but what has to be remembered that in Insurance the advisor has to do a lot more ground work to complete a policy as compared to selling a mutual fund.Medical requirements have to taken care of before the policy is completed. In case of a claim the claimants have to be helped with a lot of groundwork depending on the case. In view of that, the agent should get a renewal ommission as well as a higher first yr. commission than a mutual fund advisor.
Ofcourse both insurance as well as mfs should be sold from a view of sound financial planning for the customer.
I also do not completely agree with a 0 entry load as the customer without adequate investor education only understands he is saving a 2% entry load which is paid to the customer. Even if an advisor who provides good advice to the customer( as per risk profile etc) and renders good post sales services like portfolio updation through mf softwares and periodic reviews of the portfolios and tries to charge a fee to the customer is cheated by the customer by taking the advice and investing a meager sum with the true advisor and finally investing with another advisor or bigger distributor who may not provide all the services but will not charge any fee.
Therefore a minimum entry load of 1% should be levied for the equity products.
Sunil S Bhagat
Are you saying that entry load apart from agents commission should be there ?
Thanks for your views .
Manish
“Kudos to the CFPs of India. Read newspapers today and see the mature view being given out to investors by financial planners.” Monika Halan Editor Live Mint(Hindustan Times) Tweet-13th April 2010