Friday, February 25, 2011

Of Financial Advise and advisors

Of late, I have noticed a marked animosity from self styled “Independent Financial Analysts” or IFA’s in response to my writings about them. Most of them are angry and upset because I have written about my perception of what they sell to investors. Let me put the record straight. I AM AGAINST ANYONE WHO CALLS HIMSELF AN ‘IFA’ AND IS A SELLER OF A PRODUCT, WHETHER IT BE A MUTUAL FUND OR AN INSURANCE POLICY. I can excuse or tolerate a mutual fund, but there is absolutely no excuse for an IFA being an insurance peddler. Advice and selling are two distinct activities, totally unrelated.
The answer is simple. In the case of mutual funds, the IFA at least hawks competing products, if not all the products. The IFA who is a seller of products cannot be objective. When selling mutual funds, he is going to avoid some mutual funds on grounds other than performance. The moment subjectivity comes in, the IFA ceases to be ‘independent’. If it is insurance, then the IFA is like a blind person. The ridiculously high commission, forces the IFA to sell investment products which are in EVERY respect inferior to a mutual fund investment. I have yet to come across an investment product that is superior to a combination of a pure term policy and a mutual fund investment. So, if an IFA becomes a broker of an insurance company, he ceases to be an ‘independent’ advisor.
The other thing I dislike is dealing with ‘individual’ agents who do sell advice. There is no guarantee that I can get continuing service. I may move cities or he may. Or he may simply lose interest in the business and do something else. I have been at the receiving end of having foolishly succumbed to a couple of insurance conmen. In my early working days, a LIC agent sold me an endowment policy on the basis of the tax deductions available. After the second year, he lost interest in me, since I did not want to buy anything else from him. And having paid two years premium, I foolishly assumed that it was sensible to continue paying premiums. I had to do everything myself. If the LIC reminder reached me, I was lucky. Changing houses, cities etc, I somewhere lost track. Then after a stage when I started having time on hand, I had to go to LIC, work out the economics and revive the policy. I tried tracing the bloody agent, but he was untraceable.
Somewhere in 2001, I had (for business relationship reasons) to buy a policy from Metlife India. The first two years, the agent came home to collect the premium cheque. After that, I have no option but to do it myself. I wrote to Metlife to appoint another agent or at least give me back the amount that the agent was being paid on an annual basis as ‘trail’ commission. Metlife did not respond. I marked a copy to IRDA. No reply from them either! So, if you buy a policy from an agent, there is no guarantee of continuing service.
On the other hand, I make some investments through my banker. Over the last few years, the ‘relationship’ manager has changed several times. However, service from the banker has never suffered. Whoever is in place has picked up the threads and continues to give me service. Hence, ALWAYS DEAL WITH AN INSTITUTIONAL AGENT, if you want continuity in service.
Now, let us discuss the quality of advice. For advice alone, it is worth going to IFA’s. However, the customer has to learn to pay for advice. It is strange that we never negotiate or think twice about paying a doctor or a lawyer for advice. We pay the lawyer for advice and then go to the chemist for buying the medicine. So, we should be ready to pay the IFA or an advisor for advice on managing money. Buying should be done elsewhere. This will ensure that the quality of advice is not diluted. Since you have denied the agent any other avenue for making money, he will be focused on doing the best for you.
The other alternative for you is to do all the work yourself. And then go to an institution for buying the product. Often, what happens is that we let ourselves in for a ride by not planning out the entire spectrum, but looking at each thing discretely, as and when we feel like. We go by the last thing that we have heard.
Now, it is likely that in a few months, with a new SEBI chief, who has been a part of the mutual fund industry for some time, things will change. Maybe entry load for investments through agents or brokers would be rightfully restored. Hopefully, the NFO rip-offs will not be restored. Maybe we will have qualified persons to manage our money. Maybe PMS Managers would be subjected to full disclosures. But, none of these are going to impact what an IFA can or cannot deliver. An investor is still faced with the same choice.

Tuesday, February 15, 2011

Corruption in India

Watch this thought provoking video :

If the link does not work, just search for "Corruption in India 2010 & Before

FUDGET 2011-12. Expectations anyone?

(February 28th is the creative accounting day. New terms are invented and fine print gets a new meaning. All of this is courtesy the annual budget that is presented on this day every year)
I have enough money to last me the rest of my life, unless I buy something."
— Jackie Mason

Once upon a time, the stock markets used to wait with bated breath for the budget, every year. The british tradition of five pm budget was carried forward for a very long time, till a finance minister remembered that we were no longer a part of the British Empire.
Till 1991 or so, budgets used to be a sad thing. Every year, we had to anticipate where the customs or excise would be raised. We rarely saw broad fall in any tariffs. So, there would be more of relief rallies in sectors where the anticipated hikes in tariffs did not materialise.
After 1991, it has come down to anticipating where the good things in life will happen. We now tend to look more for generic changes across the board rather than for one particular sector or company which has lobbied (in whatever way) for and got something that will help it or hurt its competition. Those still happen, but to a far lesser extent than the past. One often wonders after finding out that some obscure provision has been changed to benefit just one company. But, Indian politicians being what they are, this will not go. To take advantage of this, one has to have inside information, which in these cases would be mostly the promoter, his family and related circles.
Now, the budget is becoming more and more of a non-event as far as the stock markets are concerned. Now, there is anticipation built upon the following areas, in general:
i) Drop in income tax rates;
ii) Drop in peak import tariffs;
iii) Drop in VAT rates;
iv) Tax breaks on housing loans, education etc.,
v) Removal or modification in subsidies;
vi) Increased budget on education etc
Reforms outside the budget are more likely to impact corporate India. The budget can only bring forth so much. Given the fact that the government is a hotchpotch of different parties, full- fledged reform is ruled out. The Congress party has always pretended to be Socialist, so we will have terms like ‘aam aadmi’ dominating the budget. As is said, “The fortune is at the bottom of the pyramid”, in more ways than one, includes collection of votes.
The budget is a presentation of the nation’s profit and loss and balance sheet on an annual basis. The one big difference is that we NEVER get an audited actual. Perhaps the nation’s wise men have realised that an audit means nothing. The budget virtually tells you the ‘state of the nation’ at a point of time in history. Political compulsions, nearness of elections (both state and central) and a new found desire to please the global financial community seem to be the main drive behind the budgets of recent years. The budget has also undergone some clever nomenclature changes, to present a better picture of financial health than it actually is. For instance, the fiscal deficit now has a new component called ‘primary’ deficit.
At the end of the day, what really matters is the sources and uses of money. The sustainable sources are tax revenues alone. What we see is that we use a majority of non-recurring revenue to present a picture that is removed from truth. What happens is that when revenue falls short of expenditure (which has been India’s story since independence, the government resorts to ‘borrowing’. This means that the government pushes in to circulation, money which is not backed by anything. So, it results in inflation. To this central government budget, we have to add the fiscal waywardness of the Indian states (alas, we are creating more and more of them, with disastrous financial implications). The net result is that we have a fiscal deficit of over ten percent of our total expenditure, which is mind numbing. Indirectly, the annual budget has a recipe for ten percent inflation. What saves us somewhat is the money that the foreigners bring in by way of direct or portfolio investments. Add to that the remittances that the Non Resident Indian sends, our finances appear to be healthier than what they really are.
For instance, in 2010-11, the government will take credit of the revenue from the auction of the 3G Licenses. Strictly speaking, it is like selling the family jewels to meet monthly expenses.
Indian fiscal situation has been out of control for a long time. It is not expected to get any better so long as we have a weak Central government, which is surviving at the mercy of wayward regional parties. These regional parties compound the national problem by adding their own doses of free television sets, one rupee a kilo rice and so many other wasteful schemes, to stay in power. Add to that the perceived ‘farmer’ lobby which results in heavy subsidies on fuel, fertilizers, electricity etc., there is no way that India can ever balance its budget.
So, if you see, at the end of the day, the budget is becoming more and more of a non-event so far as the investor is concerned. Of course, we will have the usual suspects (fertiliser, railway machinery suppliers, irrigation, education etc) where there will be a build up of hope. The Railway budget is another anomaly which exists in India. There is no rationale behind a separate budget for the Railways. It is time that it is a part of the national budget. The only thing one can see from a separate railway budget is the poor return on money that the nation gets and unnecessarily creates a power lobby of its own.
So, as far as investment goes, it is best to ignore the budget and carry on with bottom up investment themes. The budget may provide momentary hopes and agonies for the momentum traders. Naturally, there will be expectations that get built in. I have normally seen that the higher the expectation, the lower is the post budget returns from the market and vice versa. This is simply because the stock markets are comprised of expectations.
The budgets are not likely to offer any structural solutions. Let us see if there is one big bang on taxation. It is time that we live with tax rates that are fixed for life. And the other foolish expectation is whether a centralised sales tax (GST) gets in to play quickly. Most important, let us hope and pray that the Finance Minister does not introduce a new ‘Voluntary Disclosure Scheme’ to bail out the crooks who deserve to be hung). For more reforms, wait for a government with spine and majority.

Monday, February 14, 2011

Spoof of identity - Moneylife Personal Finance site and magazine

Spoof of identity - Moneylife Personal Finance site and magazine

Spoof of identity
February 14, 2011 11:52 AM |
R Balakrishnan

How many details do statutory authorities need to establish an identity? Going by the current scenario, the list is unending... And soon we will all be confronted with another ‘Useless Identity Document’

A few years back, I started a systematic investment plan (SIP) for my children. My permanent account number (PAN) card, some address proof, etc, was all that was required. Now, my son is nearing 18 years of age. The money that is lying in his mutual fund account gets orphaned on this date. It can be many days before he can utilise it and I as the guardian have no control over it now! A few months ago, the registrar of the mutual fund wrote to me seeking the details of the bank account I planned to open for my son; his signature duly attested by a banker; his PAN card and his address proof.

There is a need to submit ‘proof of old bank details’ which is marked with an asterisk. The asterisk explains that it should be a cancelled original cheque leaf (with the name and account number)/bank passbook or bank account statement (certified by the bank manager)/letter from the bank for the new bank account/passbook. The PAN card is a tough hurdle. I did apply for a PAN card for my son a couple of years back, but the agency for the card issuance refused to supply one. Their logic was strange: a PAN card is not normally issued to a minor. This was nonsense, considering that my Marwari and Gujarati friends create income-tax files for newborns and pump income in their names from age one so that they can build ‘capital’ in a tax-efficient way. Finally, after a slanging match, they issued a PAN card for my son, with no photograph and with my signature!

Now, there will be a long wait. I have to get a PAN card issued for my son. And I cannot start the process until my son is 18 years old. Then, I will have to have another battle with my banker. He will want ‘address proof’ for my son. I have been a nomad for most of my life and this is a tough ask. Luckily, not having full-time employment has its advantages. I spent many man-days and got a ration card with the address where I am residing currently. Using that as the base, I managed to get passports for my children. The bank issue is sorted out, hopefully. This whole process can take quite some time. In the meanwhile, the money is frozen. I also do not understand about the ‘proof of old bank details’. At that point in time, none was asked for. Everything was linked to my account. The account was sold to me by HDFC Bank through their ‘Relationship Manager’, who is no longer with the organisation. So, no service from them, while the Bank will continue to amass the trail commission on these instruments. This sure beats working for the Government of India.

The Securities and Exchange Board of India (SEBI) and the Association of Mutual Funds in India (AMFI) have carried the know your customer (KYC) norms to ridiculous extremes. If one has a bank account, why bother with anything else? SEBI supervises the stock exchanges, home to the most manipulative trade practices. SEBI also ‘compounds’ offences with some token fines. None of the vanishing companies has been caught—or punished—so far. According to reports, indicted players like Ketan Parekh are supposed to be operating merrily. The regulator is behaving like the dog that chases the moving car. Once it catches up with the car, the dog does not know what to do.

These KYC norms are impractical and are meant to harass the mutual fund industry and investors. The insurance industry does not seem to care for these norms. All that the Life Insurance Corporation of India wanted from my son was a bank-attested specimen signature and a nomination form. Soon, we will all be confronted with another ‘Useless Identity Document’. The Unique Identification (UID) project would have been great if it were a single requirement. But it is yet another requirement. As I said, I have been a nomad. When I switch residence, I will have to communicate these amended details to a dozen or more places! Maybe there is scope for a broker to offer his/her services for effecting ‘change of addresses’. With mobility of jobs being so high, there surely is a huge market for such a service.

Friday, February 11, 2011

A nice political blog

A nice blog, with good political insights. Go through the archives, for many things will fall in to place.