Fenil's Library

Rebates, kickbacks kill your money

Or, why getting the insurance agent to pay your first premium is not such a good idea

Kishore Kale

Agent: Sir, this is the best plan for you — it will give you good returns as well as proper risk cover. The premium is low, just Rs 35,000 per year. The insurance cover is Rs 5 lakh. After every five years, you will get 20% of this insurance cover back. At the end of the 20th year, you get the remaining 40% of the insurance cover with accumulated bonus. You are just 28 years old, so this is just what you need.

Client: OK, I know this plan very well. Another agent had explained this plan to me. When I asked him how much premium he was willing to pay on my behalf, he said he could pay 2 months’ premium. If you can pay more than that, I will purchase this plan from you.

Agent: No problem, sir. I want to complete my sales target for this year. I can pay 3 months’ premium for you. You should know that I am paying more than the commission I am receiving.

The sale is made.

This is the Indian financial services market. Nobody seems to be bothered about critical considerations such as financial needs analysis, risk measurement and management, rate of return from investment, or capital appreciation.

The result: mismatched asset allocation, huge uncovered risk, poor rate of return, capital eradication due to inflation and non-achievement of financial goals.

Here are some reasons kickbacks in financial products are so common in our country:• Competition among agents and financial organisations • Lack of a professional approach to financial planning • Perception of financial consultancy as a part-time profession • Lack of innovative financial products from financial organisations • Lack of trust and confidence in the customer’s mind about the financial planner • Lack of back-up for the so-called financial planners - no proper knowledge, no proper office with staff and no technological assistance • Low standard of entry into financial consultancy — HSC-pass plus a few elementary examinations is all that is required to start off as a financial consultant • Huge market requiring huge number of financial planners, resulting in financial organisations recruiting any half-decent Johnny as a financial planner Until 2000, insurance companies did not bother about their agents’ knowledge and skills or how they procure business, due largely because there was no competition. The only competition was among the agents — to grab maximum business — and this would often result in them offering part of their own commission to the buyer as rebates. These practices continue to this day, long after the market has been thrown open to competition.

Although such offers are unethical and illegal, they have nevertheless grown deep roots in the insurance fraternity. As a result, the customer has begun to consider a premium rebate a matter of right and has no qualms about receiving it.

After 2000, various private companies entered the fray, increasing customer awareness about maintaining financial health. With these players offering new products and services to gain market share, public sector players were forced to increase their portfolio of products and services as well.

But where were the staff required to sell their products and services to the public? Enter fresh graduates, call centre executives and banking employees, who started selling financial products with the same elementary knowledge and wrong information as their predecessors in the public sector entities.

Result? The rebating habit caught hold here too.

Sellers often offer customers freebies and discounts for buying particular products during particular time periods. Sellers use stock clearance sales as a tool for moving dated products from their stores. But, rarely is a product sold below its cost. In fact, often prices are first increased and then reduced by giving discounts, so as to give the customer a feeling that he is on the winning side. Even so, such discounts aren’t unhealthy, for the customer doesn’t lose out on quality.

But the same cannot said of intangible financial products or services. The benefits in this case come in the future and are dependant on external factors such as the world economy and market conditions. The impact of a wrong financial decision can thus be verified only in the future, by which time it would be irreversible.

Besides, it is not a one-time affair. As in farming, one’s financial health requires nurturing and caring, regular review, changing plans as per changing needs, and regular follow-up to ensure a rich harvest.

When a customer demands a rebate, he/she is risking not getting future follow-ups, regular reviews, and proper attention to maintaining his/her financial health. Discounted service cannot but lead to discounted quality.

Thus, if a financial consultant agrees to provide service on rebate, the customer must suspect his intentions and abilities. Come to think of it. You don’t ask your doctor for a rebate. Why then should you demand a rebate from the financial doctor?

A good financial planner needs to assess a customer’s present position, prioritise his needs and goals as per his risk appetite, and then suggest the proper financial product (s) required to fulfill those goals. This requires proper knowledge of various faculties of finance such as insurance planning, risk management, retirement planning, investment planning, portfolio management, estate planning, plus various laws such as the Income Tax Act, Gratuity Act, Companies Act, etc.

But, a more important quality needed in him is integrity. When a financial planner offers rebates, he compromises his integrity. This should mean that he would have no qualms about suppressing or misrepresenting valuable information to earn extra commission.

Now would you leave your money in his hands? Or would you rather go to a good financial doctor and pay his fees for proper diagnosis and treatment?

 

This piece first appeared in The Apnapaisa Blog, a personal finance forum.