Marketing of financial services and products is probably the most regulated field in India. Despite this, potential customers regularly get convinced about buying investment products which are inconsistent with their needs and future plans. In this article, I will discuss the problem of (i) Unsolicited marketing of financial services and products, and (ii) Regulations regarding marketing of financial services.
I. Unsolicited Marketing of Financial Services and Products
The biggest problem with unsolicited marketing of financial products is that no matter how good a product, if it is not relevant for you, it is a big waste.
Perfect example – I have a Nikon D-SLR lying at home. I am neither a professional photographer nor do I enjoy photography that much. Don’t ask me why I bought it but mostly I use my phone camera, if at all I take pictures. It doesn’t change the fact that Nikon D-SLR is one of the best (if not the best) product out in the market. Just not relevant to me.
Sometime back I saw this banner on a website. My initial thought was – C’mon now!! If you are going for it – why not include real estate, commodities, diamonds, ancient art and all unknown hidden treasures – ALL IN ONE.
In all fairness the idea of investing in something like this is to ensure capital preservation with modest appreciation over a longer term. The underlying theme here is to benefit from diversification across asset classes. As we have seen in recent past, when equities were soaring, debt products had no takers. When equities tanked, gold and debt products performed well. In here, you are putting your money with an asset manager who promises that he will move your money around based on where he sees appreciation, yet keep you diversified.
Frankly, if you could understand what will do well (and what wont) in the next 1-3-5 years, there is surely a better way to invest your capital. In any event, such marketing efforts address the biggest challenge which financial advisors and asset management companies face – Winning Customer Trust.
As a potential customer, this is what you should be most careful about – TRUST. As ridiculous as it may sound, the banner above may actually have helped the company get many customers, irrespective of whether they understood the merits of it.
So why exactly did the product not include diamonds, ancient art and other unknown treasures?
That would be “over-marketing”, and such a thing does exist. It will put off potential investors. The secret is to just say enough to make it sound, hmmm – just about right, just about believable.
II. Regulations Regarding Marketing of Financial Services.
There is always an ongoing battle between regulation and innovation. Marketers try to glorify products to attract as many customers within the ambit of what the compliance finds ‘OK’.
I say this based on many years of experience – compliance will eventually find everything ‘Just OK’. Anything that helps convince the client will find place. There is a reason why marketing departments are always paid higher than compliance. They have to do the all important task of acquiring the customers. The job of compliance is to help the marketers streamline their efforts within the ambit of the law.
In India, there is a full body of regulation which lays down rules with regard to marketing of every conceivable financial service. To list a few important ones:
- For financial/ investment advisers: SEBI (Investment Advisers) Regulations, 2013 – You must register yourself as an investment adviser under these regulations before offering any investment related advice unless you are already registered as a stock broker, portfolio fund manager, insurance broker, or as a pension advisor. I did a separate article on this which you can read here. The idea of exempting these categories however is that they have to separately register under yet another regulation which will be applicable to their line of business. The Investment Advisers Regulations is more like a catch all regulation – If you are offering investment related advice / stock recommendations etc, whether via a website or to individual clients, then register under these regulations unless you are registered elsewhere.
- For research analysts (equities or otherwise) – SEBI (Research Analysts) Regulations, 2014 – If you publish equity research reports, give buy sell stock recommendations, then you must register under these regulations. The big difference between (b.) and (a.) is that this is more specific to equity research analysts, irrespective of whether such analyst be an individual, a brokerage houses, merchant bankers or anyone else who publishes such reports. By doing so, SEBI’s main intention is to improve the quality of research by ensuring that analysts with suitable education qualifications and experience are only registered. Under this regulation, foreign entities conducting research on Indian markets or Indian-listed companies would need to tie-up with a registered entity in India. Again, credit rating agencies, fund managers and investment advisers are exempt from registration. Presumably because they are registered elsewhere.
- For Issuers and Investment Bankers – ICDR Regulations – These regulations apply to companies and their financial advisers who are looking to raise capital from the market via an IPO, QIP, Rights Issue, FPO and preferential allotment. I did a rather elaborate piece on this which you can read here, if you are so inclined.
I could go on and on with a gazillion regulations governing every category of financial market participant but the idea of writing this article is to make you aware of this one thing – The existence of a registration certificate under one or more of these regulations, should not make you feel any more (or less) confident about the competence of the individual / firm.
In fact, regulation mostly helps in laying down rules within which a marketer must fit things. This only gives legal sanctity to their glorified marketing efforts. To quote Henry Paulson – “There is a very real danger that financial regulation will become a wolf in sheep’s clothing.”
I have long held the view that the focus should be more on education and less on regulation. Remember – the last economic collapse was not only caused by the big regulated financial institutions, interestingly they were also the ones with whom roughly 85% of stock market participants were investing. Any success story in that crash came from the 15% who had control on their finances. In future, things are unlikely to be any different.
** The author is an attorney by qualification and would be happy to answer your queries on this topic. You can leave your comments below or write in to him at – [email protected]
I fully agree with your view sir. History is the evidence that whenever there had been financial crisis / collapse, Govt. of the country (irrespective of which nation) have come up with new set of rules running into few hundred to few thousand pages. All these regulations has made the life difficult for all. At the end common lost the track. Some people with sufficient financial power to hire bighead analysts and technological experts came up with ingenious idea to befool others, paving the way for next financial crisis. This is the brief of economic history of human civilization.