Know – Who is an Agent? … & Who is your Advisor? Part 1

Have you seen or read the Niall Ferguson’s “The Ascent of Money”? If not watch it. The book/documentary gives you a complete account of the history of  “money” and how it became so important part in the today’s world. I am going to do the same, provide you the history of Financial Distribution in India. My focus will be how agent system came into being and how advisor system took a back seat. What lies ahead of intermediaries and how will they serve the Indian Investors.

The story of investments started after the Chinese invasion of 1962. The government realized that they needed public funds to invest in infrastructure and projects country needed for development. Indians were very good savers but not much of investors. The task was to convince them and who could better do it – A familiar face of an Agent from the public.

So they came up with the tried and tested model of middleman on commission. The LIC agent & the Post office agent came into being. Anyone could become agent if he could barely read or write. They took commissions from the company like LIC or Post Office or some company for Fixed Deposit, hence they were called agents. When Mutual Funds & Private Insurance started their business, they saw the opportunity.

The competition intensified after 1992 when the door opened for the world. Very soon 40 plus Mutual Fund companies and 25 plus Insurance companies fought for a little cake. They gave their agency to these agents and applied the same concept of commissions for sales. Soon it was identified by the regulator that MFs & Insurance were technical product and need specialized knowledge but the arrow had been already shot. So they rubbed off their hands by putting some examination/training for certification, which was easily manipulated by the companies itself and agent community flourished.

But when you grow cactus in the backyard, you get thorns and not apples. Soon commercial aspect took over the need. The agents canvassed, sold and mis-sold the funds and policies. Haven’t you experienced any or many of the following:

• The agents only sold products, when they were launched (New policy or New Fund Offer). They never bothered to look at the requirements.
• Senior citizens in your family were sold ULIPs, which had a substantial equity component.
• Insurance was sold for 3 or 5 years maturity claiming they would double the investments and so on.
• Sectoral high-risk bearing funds like IT funds and infrastructure funds were sold without doing any risk assessment.
• Close ended equity mutual funds schemes were sold as they gave high commissions.
• Agent made you invest in Equity IPOs and made you fill multiple applications of other family members to earn per application
• Agent made you invest in company FDs with high interest with low credit ratings. The interest or principal repayment was delayed or denied.
• Agent only sold money back or endowment policy as they give high commissions and never told you benefits of term insurance and online mode plans.
• The agent never told or designed the roadmap of investments. He never told you how much you would require on retirement or how much insurance you should get.
• He never asked or prepared your goal sheet. He never discussed the actual aim for each investment. He randomly just makes you invest whatever you have.
• He never told you benefits of Mediclaim, personal accident insurance as these are technical products- he sells what he sells.
• He goes out of reach when markets go down and investment value comes down. Then he again resurfaces with new products when markets are good.
• He never suggests or discourages to invest in plans where he doesn’t get a commission like National Pension Scheme (NPS) or Public Provident Fund (PPF). Even bad mouth them.
• He never discusses or discloses his remuneration.
• He even pass-back or paid you part of his commission to make you invest

So, brokerage…. commission… remuneration…incentive is the basis of soliciting investing.

And you thought he is YOUR AGENT. He is loyal to his money and company for which he is scapegoating YOU.

Here comes the Regulator SEBI in the picture. The regulators are facilitator too, so they don’t cut branches of the tree but they trim.

In part 2 we shall learn about how regulators intervened and thus “Financial Advisor” or “Investment Advisor” was born. How they differentiate from an agent? And how they provide service? See you soon.

Do comment what you feel regarding this subject? Have you been duped by an agent or a faulty scheme? Share your thoughts.