Prajna Capital

Posted: 14 Nov 2012 11:55 PM PST

Business Standard Article (Mumbai Oct 22, 2012)

Within hours of receiving ~1 lakh in his bank account, Murtaza Nulwalla received a call from his bank relationship manager (RM) proposing that he use the money to buy an annuity plan. The RM sounded convincing enough and Nulwalla agreed.

But, he realised his mistake soon enough when someone pointed out that he had already been paying ~75,000 for three child plans. When he sent an email to get his purchase cancelled, the RM first called back to convince him not to do so. Then, he issued a veiled threat that Nulwalla would lose his first premium. The email, however, came to Nulwalla's rescue as the bank cancelled the purchase on the basis of his complaint.

However, not all are as lucky as him. Bank accountholders regularly get calls from RMs, who promise to give the best investment plan, the best home loan, the best credit, and so on. Many end up buying these products, some of which are irrelevant and may even be harmful for their finances.

Bank RMs sell a range of products of their insurance and brokerage arms – such as investment-cum-insurance plans and demat accounts. Sometimes, they even convince you to dabble in the futures and options segment or buy exotic products that may be a mix of commodities, futures and options, forex trade, equities, and so on.

All of these are done under the pretext of giving your returns a fillip, offering you post-retirement security, and protecting your children's future.

The fact, however, is different. Selling these products earns RMs high commissions. If their salary package is, say, about ~6-7 lakh, the target for 'income achievement' is ~80-90 lakh —about 12 times the salary. An RM has to generate that much income, or at least 75 per cent of it, to earn his incentive. It is possible for an RM to earn ~3 lakh every quarter if he meets all his targets.

If you were to lose money or were unable to bear the cost of an insurance product, it would be your responsibility. "Though people come to me to file such cases of mis-selling, it's not always possible for want of evidence," explains consumer activist Jehangir Gai.

Business Standard sent emails to a number of private and foreign banks but none responded.

However, many bank executives agreed off the record that banks' high concentration on fee income leads RMs to sweet-talk their clients into investments that might not be in the best of their interest.

Stock market and mutual fund investors and buyers of insurance products are more or less aware of the commission earned by their brokers, distributors or agents. But, there is little clarity on the commispaid to a distributor or an agent. So, it is not a case of overcharging the customer. It could even be cheaper, because the banker is an employee and Another problem: When a for at least seven to eight years, there was little chance of getting reasonable returns from an insurance product. No wonder, the financial planner hung up, disgusted.

The more complicated part is the redressal mechanism. A bank is regulated by the Reserve Bank of India, but its insurance arm is under the Insurance Regulatory and Development Authority and the brokerage arm under the Securities and Exchange Board of India.

Under these circumstances, you might have been sweet-talked into buying an insurance product by a bank employee, but the redressal might often lie with some other regulator.

The good thing Nulwalla did was sending the email immediately. Also, his old RM rejoined and helped him reverse the payments. What had spoilt the possible deal in this case was Nulwalla's realisation that he had been approached the same day ~1 lakh was deposited into his bank account. He has decided to close his account with the bank.

In ideal circumstances, the role of an RM is to provide a customer with a single-point contact for all his banking needs. But, with RMs under pressure to meet sales targets, the line between the customer's 'need' and their own 'target' gets blurred.

Many a time, the problem lies with customers as well. "Customers should also be aware of the extent of risk they can take and returns they want to earn before blaming their RM for missselling," says Gaurav Mashruwala, a financial planner. If you tell your RM you can invest money for 10 years, the RM may suggest investing in equities. However, after three years, if you find that your investments are not doing well because the equity markets are falling, it is not the RM's fault," he adds.

They hawk the 'best loan, credit card, insurance products, forex deals'... but do you really need these?

Be Wary If Your Relationship Manager :

· Is vague about the terms and conditions of products

· Dangles the 'limited period' offer |Does not provide information about investments that haven't been made through him

· Avoids your calls during bad times

· Does not give satisfactory responses about your investments

· Tells you to just sign application forms and promises to take care of your KYC requirements


	Confessions of a Relationship manager

I started as a relationship manager seven years back. During our training, we were told our performance would be gauged by the number of products we were able to sell. Our incentives would also depend on that. The easiest product to sell was insurance. Often, customers did not take the trouble of going through the product documents in detail. This was, in fact, good for us. Sure, we were told that mis-selling could land us in trouble. But, as senior colleagues pointed out, by the time a customer would realise a policy was not the best for him, it would be too late for him to back out. So, I was selling insurance policies from day one, even as I cleared the Irda certification exams only two years later. During this period, one of my senior colleagues, who had been certified, would sign as the agent on the form, as I was not qualified to do so. Thankfully, none of the clients I sold policies to noticed this. Once or twice, I have even put the initials of my clients on forms, if those were missing at some places. They wouldn't know about it because they just signed the application form and left the rest to me. As I look back, I realise, doing such things, if discovered, could have cost me my job. Besides insurance policies, I also sold different kinds of credit cards to the same customers. I had this group of 10 customers, all of whom were high-networth individuals. The concept of discount worked wonderfully. So, the same customer took one card for discounts on airlines, another for discounts on spas and the third for discounts on hotel bookings. I also sold add-on cards for family members. Not many of them used these cards, since they already had other credit cards, but they bore the annual fee. It didn't matter much to me, as my incentive was based on the number of cards I sold. Today, it is tougher to push insurance products, as insurance companies directly call customers to check if they know about the product, premium and so on. Credit cards are also not being sold as recklessly as earlier, due to the rising cases of defaults. But, as long as banks continue to push RMs to sell products, there will always be some instances of mis-selling.

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Is it enough to insure only breadwinner of the family?

Posted: 14 Nov 2012 09:16 PM PST

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THE primary intent of buying a life insurance is to protect the financial needs of one's dependent family, in case of an untimely death. The amount of insurance required should be enough to compensate the monetary or economic loss that the family would incur post the breadwinner's death.

The amount of economic loss is equal to the economic value of all those who contribute to the family income. It could be defined as the amount that the family would require to retain the same standard of living in the absence of the earning member.

In case of a single income family, let us assume that a person has a monthly income of Rs 20,000 and the net income provided to the family post deducting personal expenses is Rs 18,000. Thus the annual income provided to the family is Rs 2,16,000. To generate Rs 2,16,000 annually, the corpus required will be Rs 36,00,000, assuming that this corpus is put in a fixed deposit that will give an annual return of 6 per cent.

So, ideally the person should have at least a life cover equal to Rs 36,00,000 as on date, which needs to be reviewed periodically.

In the case of a double income family, let us suppose that the husband's monthly income is Rs 15,000 and his wife's monthly income is Rs 12,000. Post deducting their personal expenses, they collectively contribute Rs 20,000 per month to family's expenses, that is, Rs 24,0000 annually.

In such a scenario, the family needs to protect both the incomes to the level they provide for to the family's expenses.

Hence a life cover for both the spouses is required.

If something unexpected happens to the breadwinner, the family will require a large amount of money to replace the income that breadwinner was providing. The same logic is applicable for a housewife who is often the most under appreciated person in the household.

Even though a housewife may not be directly contributing to the family income, the housewife saves family income by providing services such as managing the household and looking after children and/or aged parents free-of-cost. All these efforts also have a monetary value, especially if you were to replace it, by hiring paid services of similar nature. Many of the services might not even be replaceable.

So one can calculate the human life value or replacement value of a housewife also by estimating the costs that one would incur for cooking, house maintenance, caretaker for children or parents and tuition.

Another way, as suggested by financial planners, to do a valuation of a homemaker is based on the "opportunity cost".

Opportunity loss means the loss incurred by quitting a job or appointing someone to look after the home. In certain cases, a working spouse might want to take some time off to look after the family, post the homemaker's death. This period often ranges from 18 months to 2 years and is known as the `readjustment period'.

During the readjustment period, the income of the family needs to be replaced and adequate life insurance is one of the ways to provide for it. The readjustment period can be applicable for any couple immaterial of whether earning or not.

However, we need to remember that life insurance can only fill the economic void, the emotional loss is irreplaceable. Life Insurance ensures that the emotional loss is not compounded by the financial loss.