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How Stock Analysts Can Mislead And Still Go Scotfree

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Experts point out that there is no law in India that regulates analyst opinion and therein lies the loophole. The analysts' communication is crafted so well that there are enough gaps to exploit and also to save their skin in case it backfires.

“In the US, no analyst can change his opinion within six months and if such a change is warranted due to events such as a drastic policy change, he has to file the reasons to the SEC (US stocks regulator),” said Mr Kishor Ostwal, CMD, CNI Research.

As a result, there is no safety net for the retail investor. There continue to remain question marks on what is said and what is actually done, said market experts.

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that's too advanced for indian regulators when investments in equity wrapped in a thin veneer of insurance are ruled by the SC to be out of the scope of the SEBI which has much better consumer / investor protection than IRDA.

it would be a great start if the track record for each analysts prior picks is disclosed in all print & TV opinions.

here is what i had written a year ago on the insurance/investment regulatory void for hybrid products:

"... The bigger issue is the massive mis-selling of ULIPs as judged by their lapse rates.

The hidden fees and charges make the product very complex to understand by the individual.

While reduction in charges benefits the customers and hurts the agents, the lack of transparency is the biggest flaw.

Its true that 1st year charges have come down from almost 50-60% to around 15-25% but they are still very high compared to mutual funds.

While SEBI's step to ban all ULIPs was a bit extreme, it has forced IRDA to reconsider its stand on these products which are tilted in favour of agents instead of customers.

What can be done to improve transparency for ULIPs?

As a start, each policy benefit illustration should simply compare the ULIP premium & sum assured with term plans [pure risk cover] at the same S.A. while the balance premium goes into mutual funds with the same rates of return.

These illustrations should also be multilingual in Hindi and the state language.

Secondly, the annual charges should be uniform instead of mostly upfront which will reduce lapse rates and improve renewals.

Thirdly, online calculators should be provided to compare any 2 ULIPs approved by the IRDA so customers can clearly see which one has lower cumulative fees over the entire term of the policy assuming all other factors remain the same.

Fourthly, all ULIPs should offer monthly or quarterly options so its not an 'all or nothing' approach to trying to time the market and customers can benfit from rupee cost averaging which helps reduce investment risk.

Fifthly, no income proof should be required other than self declaration by the customer based on their tax bracket since neither insurance or investment are loans in any form.

We get credit cards with lakhs in credit limits without any income proof so it should be the same for insurance.

Sixthly, compensation including bonuses should be made semi-annual or quarterly instead of annually.

Currently most agents seem to wake up in March to pressure customers to sign up before the fiscal year end and are virtually asleep in April - May.

Seventhly, all ULIP performance figures should show 'net returns' based on gross premiums paid instead of 'gross returns' which always look higher.

All the objections of the IRDA aside, ULIPs are primarily sold as tax deductions and investment products and the low SA compared to the premium paid is proof that life cover is not a priority.

The multiple of SA / premium is usually around 15 - 80x for ULIPs while its 100-200 x for term life plans.

Anything sold as an investment in equity markets is under the jurisdiction of SEBI.

Any other thoughts on fixing ULIPs and simplifying them?

Disclaimer: I don't work for any MF or LIC currently. I have never sold any MF or LIC in the past."

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