Be rational not emotional

Make financial decisions based on returns, costs and clauses, not on advertisements

Which of these sales pitches do you find more appealing? A product which proudly states that had you invested in it for the past five years you would have earned a Compounded Annual Growth Rate (CAGR) of 17.82 per cent, thereby giving you a ‘Real’ return of 9.27 per cent.

Or, a product which vividly depicts what it can do for you in the future if you purchase it today. This could involve images of you gifting an expensive cycle to your nine-year old grandchild, you beaming with pride at your child’s graduation ceremony, etc.

Most would prefer the latter mainly because they can connect better with it. This is not a hypothetical case. This is the actual difference between how mutual funds and investment oriented life insurance/pension policies have been marketed over the years.
 

DON’T GET CARRIED AWAY BY

• Advertisements that keep harping that by investing in a specific plan, your life will be secure. 
• Products that do not tell you enough about the features, fees and exclusions
• Agents or distributors who tout past performance by giving numbers of periods that suit their purpose

Mutual funds are perennially distraught over how retail investors are not signing up in hordes despite being offered low cost products and giving reasonably good returns for nearly two decades now. While their marketing departments are at a loss regarding how to redress this, I feel that the advertisements put out by most of them are not helping much. They often highlight the returns given by the scheme more prominently as compared to making emotional pitches. While the rational side of consumers may agree that this is the best approach, their emotional side prefers the insurance product advertisements.

A sustained blitzkrieg of such advertising has helped create a demand pull for such products and resulted in impressive top line growth for life insurance companies - even though the bottom lines of most companies are still littered with ‘red’.

While the lack of distributor incentives is a pertinent reason for the fall in mutual fund sales, I feel that consumers are already pre-sold onto an insurance product as a result of the emotion laced advertising undertaken by the companies. This makes the job of insurance agents easier.

If one critically assesses these ads one will realise that they hardly contain any relevant product feature/s which may assist a prospect to arrive at an informed decision. In fact the ads disguise more than they reveal. Let alone the ads, even the names of products are chosen with the aim of making the right side of the brain overrule the left side. This subterfuge is not restricted to print advertisements alone. Television ads are equally egregious. In fact, I believe that the creative juices flow more freely when producing ads for this highly influential canvas.

Also, it is sad that ads for unit linked insurance policies (Ulips) do not even have to display something similar to the standard disclaimer that mutual funds have to provide viz. “Mutual Funds are subject to market risks. Read the Offer document carefully before investing”. This, despite agents often portraying Ulips as mutual fund products with complementary insurance bundled therein.

Mutual fund advertising codes are subject to stringent and periodic regulatory oversight, which is not a bad thing at all. However, I do wish that insurance ads were subject to some oversight too.

Products such as Ulips are complex, multi-layered products with several embedded costs which are not easily discernible at the outset. Other traditional policies, such as money-back, are even worse in terms of opacity. Hence prospective applicants are compelled to rely on insurance agents to explain the same, which in turn opens the door for mis-selling. While I am not implying that the current ads are deliberately egregious, I believe they should contain more factual information so that prospective policyholders can take more balanced decisions.

At the same time, it would be remiss of me not to commend insurance companies for their recent ads for online term plans. These very clearly depict the benefits of high insurance cover at a low cost. Alas, such ads are more the exception than the rule.

I hope the Insurance Regulatory Development Authority (Irda) reduces the latitude for life insurance companies by strengthening the provisions of the Advertising Code just as the Securities Exchange Board of India (Sebi) has done for mutual funds. After all, the purpose of financial product advertising should be to educate as much as to entertain.