Honesty, Transparency, and Trust

During this week, at a marriage ceremony, I met one relative. He is a senior citizen and retired a few years ago. He was curious to know what am I up to these days. I told him that I read books, write books, am a full-time stock market investor, and help retail investors create wealth by investing in mutual funds.

When he heard about the stock market, his immediate response was it is too risky. I said, “Yes, direct equity investment is risky but there are various options of mutual funds which are safer and less risky.” He was not aware of this and wanted to know more.

I asked him where does he invest his savings. He said all my savings are with the post office. He recently shifted his entire savings from nationalized banks to the post office. He thinks the banks are getting privatized, and hence funds parked in these banks are also not safe. I could sense his anxiety and risk appetite. He is correct in his way.

He further said,“ I don’t know how much money I may need for health emergencies, and hence I want to keep them in safe custody.” I asked him whether he had any health insurance or not. He nodded in affirmation and added that his experience with health insurance is not so good.

Last month, he fell sick and was hospitalized. The hospital expenses ran up to Rs. five Lakh. However, the insurance company paid him only Rs. 3.5 Lakh. He has to shell out the balance amount from his savings. This incident has shaken up his confidence. Now he is not sure how much money he may have to spend in the future for a health emergency. Hence he is unable to plan his investments. Even though he has paid for the health insurance, this risk of hospitalization is giving him sleepless nights. And that too for none of his fault. So sad but true!

My friend was sitting alongside me. He was furious when he heard about health insurance. His story was similar. After he was discharged from the hospital, the insurance company refused to pay a single rupee toward his claim. He even lodged a written complaint, but the company never bothered to help him and resolve his issue. After a few months of battle, he has lost hope and does not wish to expend more energy and time on this matter. The insurance agent from whom he bought this policy is also not reachable.

There are about thirty health insurance companies in India. The market opportunity is enormous, and every company is fighting ruthlessly to gain that market share. In this vicious cycle of achieving the sales target, the agents are misselling products. They are taking undue advantage of the ignorance of the common man by pushing the wrong products and without providing complete information. It is being said that the hospitals are also hand-in gloves with insurance companies. They deliberately include more items and services under the exclusion category and inflate the bill. This is a dangerous precedence.

While selling health insurance, companies never disclose the exclusions categorically. There is a lack of transparency. The exclusions are known only when one has to pay a hefty hospital bill. The trauma and agony of being sick aggravate manifolds with this additional financial burden leading to mental stress and bad experience.

The Insurance Regulatory and Development Authority (IRDA) of India needs to lay down stringent guidelines to ensure adequate transparency during the entire process of purchase of health insurance policies and disbursement of claims. IRDA needs to do a lot of groundwork to improve the system. Till the time IRDA acts decisively, the retail customer will have to go through this agony and pain. More so, such bad experiences eventually lead to a loss of trust in one of the important organizations of India.

Luckily for the mutual fund industry, the regulator SEBI has been very proactive and vigilant. The regulations brought in by SEBI over the past few years have increased the transparency and credibility of this industry. The systemic issues have been taken care of, and the industry is now much more mature and responsible. There is built-in transparency in the system, and this is visible in the increased confidence and participation of retail investors.

However, the mutual fund industry is also not immune to human greed and selfishness. There are chances of misselling here as well. As of date, there are forty-four mutual fund Asset Management Companies (AMCs) in India. These AMCs are managing more than 2500 mutual fund schemes. For a retail investor, selecting an appropriate scheme is a daunting task. Hence he needs to depend on his distributor to invest in the best schemes suitable for his life goals. The retail investors hand over their hard-earned life savings to the distributor with a lot of trust and hope.

While selecting the scheme for investment, the only aspect a distributor must keep in mind is the financial benefit of the investor and nothing else. However, when the distributor starts to seek personal benefits at the cost of the investor, then it becomes an outright betrayal of the trust reposed on him. Once you lose this trust, it can never be regained again. It has gone forever.

The wisdom of Warren Buffet elaborates on this behavior precisely when he says:-

“It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do things differently.”