03 November, 2011

Legislation is no replacement for Financial Literacy

Visiting parks and gardens has always been a pleasurable & soothing experience – not to relieve my straining bladder as my initial description might have indicated. It gives immense happiness just to be amidst the greenery and the sublime serenity that these havens seem to exude. So, I suppose it’s settled why I visit parks… While we take the whole thing for granted, it takes enormous effort to create one. There are all kinds of plants – some that grow without any support and others like vines, which require support. All these plants would ofcourse require optimal dose of nutrients, water, sunshine and tending so that they grow & flourish. Also, there are pests and animals to take care of. In effect, quite a handful needs to be done to ensure that what is planted, grows. Our government has given the framework in the Financial Sector by way of legislations – for Equity/ MFs, Insurance, Micro finance, Banks etc. There has been quite a burst of activism among the various regulators, in the recent years. They are striving to create an environment where the investor will not get misled and get a good deal. This is a laudable objective. In some senses, it is working too. But, legislation alone is not a panacea that will cure all ills that the common investor is afflicted with. The missing links today are that the investor is not fully aware of the financial landscape, the products & services, does not have the knowledge to interpret the information that is presented to him and is unwilling to allocate enough time to study the offerings and make informed choices. That ofcourse opens out the field for manipulation from unscrupulous elements, who will lead them up the garden path and sell them some apple-sauce, which is entirely unsuited to them. Result – an aggrieved customer, who thinks that the financial landscape is crawling with crooks. Turncoats there are, like in any profession. And like everywhere, the good ones far outnumber the black sheep. The problem in this case was both knowledge and willingness to spend time, understand the offering and take an informed decision, instead of blindly signing at every cross-mark that have been so thoughtfully pre-printed! This is an aspect that seems to have eluded the regulators. An informed and engaged customer is far more likely to take correct decisions; time and effort needs to be put in that direction too. Legislation is not a silver bullet that will cure the system of all it’s ills. Legislation is rather just one of the important components, not the only one. The regulators have been neglecting this aspect and it is showing up… instead they tend to bring in more regulation and end up over-regulating the industry under their charge, wringing out the life-force from them in the process. People are getting fooled by pyramid schemes, they get sold wrong insurance products, are holding unsuitable MF schemes, get into risky financial products, have wrong asset allocation… many investors just go by what their friend or colleague has done or recommends, without understanding the suitability. Lots of them chase fads – currently it is gold, silver & property investments. Some of these can be attributed to greed. But the significant other problem is the lack of financial literacy. Legislation cannot solve this. Concerted effort is required to address this. It is easy to bring a law – just a committee of a few people can bring in a well-meaning piece of legislation. But, education/literacy takes time to percolate. Putting up a few pages is not tantamount to educating people, as some regulators tend to believe. Ofcourse, that part is easy and that’s why they do it. Financial illiteracy costs everyone a lot. It hurts the investor, the distributors, the financial service companies & the economy at large, as an investor who has a bad experience does not go back to that asset class. For instance, many who had invested in company FDs in the past and lost money, are still wary even though the landscape has undergone a seachange now. It hurts the investors as they are not participating in good products available today and the companies who are unable to get much money from this route, due to investor indifference. Finally, investors themselves need to take up the onus of educating themselves, as that is in their best interest. If they are spending their whole lives to financially secure their family, why not spend some time to educate themselves on finances, so that they may secure their bases. Makes sense, doesn’t it? That willingness will mean all the difference between a financially secure future and another filled with worries. Just like the park that needs a fence to secure it from animals & pesticides to keep the worms at bay, ensuring adequate water & manure is the role of a regulator. Using the ambience provided and growing up in glorious profusion is what the plant will have to do – that’s the investor’s job too. Like they say, the horse has to still drink, even if it is taken to the water. That applies to investors too. Authored by Suresh Sadagopan ; Published in The Economic Times on 3/11/2011

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