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Fancy, misleading names and meaningless choices only confuse you

 

The investors who have to choose financial products deal with mindless complexity. Investors are left with a confusing cacophony of offerings from competing producers. How can this problem be fixed? First, fancy naming of products should stop. When mutual funds began gathering assets by launching a series of NFOs, they allowed their creative teams to go berserk-there were tigers, cubs, stars, and other variants. This made it tough to create peer groups to compare funds and make a choice. All existing funds with fancy names should be closed, merged or modified even if it is difficult. Similarly, insurance companies should be prohibited from naming their products that mean little.

Second, a financial product's name should not be misleading, only to be clarified in fine print. Several new Ulips come in disguised names since investors have woken up to the losses from buying and holding them in the short term. There are endowment plans masked as assured return products; annuities sold as retirement plans; and the highest guaranteed NAV product is unravelling now as regulators have moved in. There is also the crime of 'passing off', where the product uses terms such as 'fund' and 'NAV', making it tough to tell whether it is insurance or a mutual fund.

Third, the presence of the same player in multiple product markets leads to brand confusion for investors. The promoter may use a name that the investors know and trust as a bank, but it may be a risky insurance, which is not the same as a bank deposit. Several well-informed investors do not know whether they hold a mutual fund or an insurance policy. They simply know that they have a financial product of a good brand and bracket all products similarly. It is important to label the product upfront and mandate that it be classified correctly. The ads and brochures should say, 'this is an insurance product' or 'this is a mutual fund product'.

Fourth, the investor does not know who will manage the money when a product is repackaged, white labelled, or offered 'exclusively'. The investor is not told who will manage the money when a structured product is 'tailored' and offered by a broker. The investor should be able to differentiate between the distributor, the passthrough vehicle, and the final manager of money. These cosy selling deals are not in the interest of customers, who are fooled into believing that they are receiving a preferred access to a special product.

Fifth, all packages should be broken down into their components. A child education product should mandatorily disclose that it bifurcates the premium into insurance and investment, and offers a portfolio return along with insurance. This information should not be in fine print inside a voluminous offer document, but on the cover page. Bank deposits should state the tenure and rate as percent per annum, without misleading investors by bundling in tax benefits and showcasing the deposit as more attractive than it actually is. Investors need to know the risk they are taking, and without knowing what will happen to their money, they cannot take meaningful decisions.

Sixth, wherever possible, generic products and options should have commonly understood simple names. There is little need to give a fancy tag to a facility that enables reinvestment of periodic dividends or interest. Or project it as a product choice. Several investors do not know that the underlying portfolio is the same and that the difference is only in post-tax return and cash flow. This is due to the difference in tax treatment of capital gains and dividends, or due to the compounding effect when the frequency of interest payment is modified. They do not see that the same set of cash flows can be rearranged. These facilities should be uniformly named and explained, and it should be easy for an investor to choose what works for his needs and tax status. Simple generic products such as deposits, bonds, index funds and term insurance should be named as such. There is no need to use an acronym to describe an index fund. It should be easy for an investor to buy such products after comparing costs and performance.

There is a lot that the financial services industry can do for the investor. It can drop the pretence that naming, packaging, and meaningless choices differentiates them from competitors. Good product performance, ethical practices, reasonable costs and sensitive customer service are the enduring differentiators. 

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