Distribution of Financial Products - Push vs Pull

Posted by: Uma Shashikant on Mon, Sep 6th, 2010

Even as we continue to debate the lack of incentives for selling mutual funds and the mis-selling nightmares in insurance products, the space I was watching was the National Pension Scheme (NPS).  Here was the product that was perfectly designed, after years of research and filled with the good intention of taking pension products to the population that needed it most. The product was a good one, offered choices, was available at low costs and should have taken off, if the belief, especially among regulators, that a good product would sell from “pull” rather than “push.”

 

 But NPS has not taken off as it should have, attracting very few subscribers and managing a much smaller than expected corpus. (The PFRDA website does not seem to feature statistics; Numbers reported in the press vary).  However, while setting up the G. N. Bajpai Committee to review the implementation of the NPS, PFRDA in its terms of reference admits as much - “The National Pension System (NPS) has not proved to be as popular as was envisaged under the original vision and architecture, especially in the non-mandated, non-Government/unorganized segment.

 

Last week, an ADB-IIEF roundtable was held in Delhi, to discuss the findings and recommendations of another report on national implementation strategy for NPS. Among other things, it points to the need for incentives to sell the scheme and for marketing strategies, including a literacy campaign, to create the “pull” for the scheme. It also mentions ‘social-protection floors’ and ‘level playing field on tax treatment.’ While we await the final report, as well as the recommendation of the Bajpai Committee, here is my two-bit on financial product distribution and the push vs pull debate:

  1. The key concern of policy and regulation should be about mis-selling of products and not about the product structure, distribution, incentives or marketing strategies. Regulation should adopt a strict gate-keeping policy that allows only those who are qualified to sell, are willing to adhere to a code of ethics and will accept penalties for mis-selling.  The problem we have here is that intermediaries sell all financial products, but there are three regulators (Sebi, Irda, Pfrda) with limited and poor gate-keeping policies.  This is an area crying for co-ordination among regulators for creation of a common framework for regulating the conduct of sellers and distributors of financial products. 
  2. If one takes the benevolent approach that  products should not be ‘sold’ but ‘bought’ by investors, as has been assumed by both Pfrda and Sebi, at this time, assuming that literacy campaigns and industry-level advertising will solve the issue, is a simplistic approach. Getting the investors to choose financial products that are actually beneficial to them is not about placing the choices in front of them and asking them to choose by themselves, or asking them to pay advisors who help them choose.  Much of the debate in the last one year of implementation of the no-load regime in the mutual fund industry has focused on the loss of assets in the industry.  The moot point is whether the regulatory change resulted in more investors choosing from the well-established and top-performing funds, on their own. There is no evidence on the ground to show that investors are actually making the “good choice” for themselves. The regulatory concern should therefore be: How to reach useful financial products to investors through a responsible “push” strategy, rather than assuming that “pull” is desirable and would work.  We may see wasted marketing and publicity effort. The omnipresent IRDA campaign asking investors to call to register a complaint is a case in point. At a huge cost, the campaign is not helping product choice or education, but only the comfort that the regulator would do what it is anyway expected to do.
  3. That brings me to the question of “pull” strategies that have actually worked.  Two features instantly bring investor interest to the table - one, assured level of return, however small it is; two a tax-incentive that enables an investor to pay less tax on account of buying the product.  A product that features even either one of the conditions works, but investors place a higher emphasis on assured (or perceived assurance) returns over tax saving (notice the pull of taxable bank deposits, over tax-exempt ELSS products).

My sense is that pulling off the plug on incentives to sell mutual funds, has ended the producer-distributor nexus but has not done much to the investor's choice of the product, since regulation has not addressed the core issue of regulating the quality of advisors and penalties for mis-selling.  I digress, but more on this later. But the point I like to make is that we still do not have evidence that the changes to regulation for mutual fund distribution practices has resulted in creating a pull for the products from investors, not in the one year since the change.

 

The direction that PFRDA seems to be moving is to bring in return assurances of some kind and tax-breaks.  It may also bring in some incentives for distributors. If this happened, I would worry about the assurance-cum-tax break based  “pull” for financial products becoming  a costly solution (think growing liabilities for the government), distorting product design and skewing investor preferences.  It is important that incentives to push the products remain, in a regulated regime that penalizes mis-selling.  That is the regulatory imperative.

 Posted by Sunil Date on Fri, Sep 17th, 2010 1:55:51 pm

We cannot deny that there was rampant mis-selling in MF as well as insurance. It is also equally true that it is not the MF industry's job to decide the commissions andd front load it. So logically it is between the customer and his advisor to mutualy decide. But the MF industry is in a nascent stage and we need to attract the retail as well as the rural investor. Does any one believe that the retail & rural customer will pay the advisor especially when they have been accustomed to get rebates in Insurance as well as the post office products ?
 Posted by Uma Shashikant on Sat, Sep 11th, 2010 12:14:46 pm

I tend to agree with what Vinod has to say. Perhaps being too righteous about investor protection is leading to an approach that stifles growth of the industry. It is easier to blame regulators for the current state of the mutual fund industry, or ask for stringent norms for other competing products like insurance. What is needed is a debate that can bring alternative approaches to the attention of the regulators. A balanced approach that serves both investor and distributor interests is needed. If we are able to articulate such an approach, we may be able to take this debate ahead.
 Posted by venkateswara rao yelamanchi on Sat, Sep 11th, 2010 12:03:36 pm

mutual fund industry as a whole is being meted out the harshest treatment in the name of regulation.many a times the measures border on extremes.most of the other segments of capital markets,industry,various other spheres of economic activity are being decontrolled,liberalised.m.f. is being subjected to stifling,retrograde regulation.it is high time regulate other segments sensibly.
 Posted by vinod on Fri, Sep 10th, 2010 10:40:33 pm

Most debates on the role of regulator in any industry tends to get muffled,very righteous especially on consumer related issues.The role of the regulator is to set ground rules of fairplay(how do you to reconcile between the role of distributor as an agent of AMC and the fiduciary relationship shared with investor),articulating the relationship between various stakeholders and penalty for violation of these rules.It seems the regulator (dont know whether peculiar to India)is taking the easier route of being prescriptive,strengthen its enforcement arm.Why dont we see mystery shoppers from regulator visiting distributors? Why dont we read any reports from regulator talk about trends on Indian consumer behaviour on investments etc?(like RBI does for banking). Even the most well intentioned policies need to be reviewed in context of 'stage in industry cycle','stakeholder dynamics' etc. Bottomline, when will we see more vigrous debates.
 Posted by Anmol Kumar Gupta on Fri, Sep 10th, 2010 3:48:41 pm

There are three major products associated with a layman Indian Retail investor. PPF NSC FD Are the commision are not bieng paid. It was a right decision to scrap the entry load but without a thought process. MF industry is just like a baby which has not enough strength to stand on her feet. Since decisions has been taken and cannot be rolled back so SEBI should also think in fair way. It should provide the support and some alternative to the MF industry so that the later could be able to connect with the masses. If SEBI is not itself a social organisation than it should also think that people because of whom its existance matters. So Sellers, AMC,s and SEBI has to think in the line which guards the Interest of customer and helps to grow the industry as awhole
 Posted by SUMITRA SWAIN on Fri, Sep 10th, 2010 1:13:01 am

HI UMA, MF PRODUCT PUSH VS PULL. IF U THINK ABOUT UR HEALTH U NEED EXERCISE WITH PROPER CONSULTANCY.SUPPOSE A YOUNG JOIN TODAY IN A NEW JOB,BEFORE HE THINKS ABOUT HIS WEALTH, MANY ADVISORS ARE THINKING ON THAT YOUNG'S WEALTH.BECAUSE CHEAPEST WORK IN THIS WORLD IS ADVISE.AMFI RECOGNISED THREE CHANNELS FOR MF DISTRIBUTION OR SELLING THE PRODUCT.BUT NOW ANOTHER TWO CHANELS WORKING PROPERLY BY PUSHING, ONE IS AMC'S RMS' ARE ADVISING DIRECTLY TO INVESTORS BY PUTTING MASTER/DUMMY ARN CODE. SECOND ONE IS AMC'S TIE-UP OFFICIAL COURIER BOYS, THEY ARE DELIVERING A/CS STATEMENT & REDEMPTION CHEQUES BY THE WAY PUSHING & ADVISING M/F PRODUCT .NOW THEY ARE TAKING ARN CODE BY THE HELP AMC'S EXECUTIVES.SO WHO SAVE INVESTORS' WEALTH? AN INVESTMENT CONSULTANT/BANK RM/ND RM /AMC RM OR A COURIER BOY.
 Posted by Sourabh Sharma on Thu, Sep 9th, 2010 9:30:20 pm

I think "Regulators" are working like dictators & not like regulators as their regulatory changes are hardly concerned or helping for the investor. Changes hardly takes care of mis-selling. in fact, mis-sellers will find some other ways of mis-selling. Rather, reduction in commission/incentives may attract comparatively higher volumes of miss-selling as distributor/agent would not compromise with the amount of commission/incentive that they were earning in the past. In fact, in many of the insurance products the only change is "reduction in commission" & not actual cost of the product as mortality rates have been increased in case of ULIPs. Without disclosing the name of the company; I would highlight an example of an insurance product wherein premium was approx Rs. 9000 for a sum assured of Rs. 50 Lacs for a 30 years old healthy male life in older product but with similar details in new product the premium is approx Rs. 12000. This product would have been approved by regulator only; in such a scenario how can we even say that new products had been designed more beneficial for the investor ?????
 Posted by Sourabh Sharma on Thu, Sep 9th, 2010 9:26:15 pm

I think "Regulators" are working like dictators & not like regulators as their regulatory changes are hardly concerned or helping for the investor. Changes hardly takes care of mis-selling. in fact, mis-sellers will find some other ways of mis-selling. Rather, reduction in commission/incentives may attract comparatively higher volumes of miss-selling as distributor/agent would not compromise with the amount of commission/incentive that they were earning in the past. In fact, in many of the insurance products the only change is "reduction in commission" & not actual cost of the product as mortality rates have been increased in case of ULIPs. Without disclosing the name of the company; I would highlight an example of an insurance product wherein premium was approx Rs. 9000 for a sum assured of Rs. 50 Lacs for a 30 years old healthy male life in older product but with similar details in new product the premium is approx Rs. 12000. This product would have been approved by regulator only; in such a scenario how can we even say that new products had been designed more beneficial for the investor ?????
 Posted by Krishna Gopal Gupta on Thu, Sep 9th, 2010 9:17:28 pm

I fully endorse Uma's view on NPS and regulators. When distributors are certified by AMFI & IRDA the responsibility shifts to regulators (why they donot own it?); only then they are able to sell to investors. In my view, mis-selling is being done largely at banks, where no certified persons are employed and / or any service is provided to the customers. They simply garner the new business by mis-representing or half-disclosing the features. Further, these so called salesmen at banks are not available when any of the customer need them. The other staff then re-directs to the company. IFAs are being targetted and projected as wrong-doers whereas they are entreprenurs who are working hard to earn their livelihood. In which profession, some wrong-doers are not available. If the auditor of Satyam was not fair enough that does not mean all CAs are selfish & so on. Are all brokers under SEBI not mis-selling stocks in the guise of tips by SMSes and e-mails and writing biased articles? Is SEBI not aware of it? What action SEBI has taken to safeguard the investors there? Actually, SEBI is over-enthusiastic to take over IRDA when it can not clean its own house.
 Posted by Uma on Wed, Sep 8th, 2010 9:29:58 pm

My sense, Manoj, is that unlike the economist community that keeps a hawk's eye on the RBI's stance and policy, Sebi does not seem to have the benefit of public debate from non-interested parties. The media has also been baised, and mostly pro-Sebi. The industry and distributors on the other hand, are convinced that the regulator is out to close their business and are bitter. Therefore it becomes tough for them to present their case without being accused of vested interest. Tensing, as you point out, the investor seems to have been left out of all of this!

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