FSA raises the bar on suitability

Expense Account, Mint

Iknew theoretically that large finance firms—banks, financial product manufacturers and financial advisory firms—move to countries with lax regulation. But I am seeing this happen real time right now. In the next two years, I expect large boat-loads of suits to wash up on the Indian coast. They’ll all be escaping from rules that make cheating retail investors very difficult. The British regulator, the Financial Services Authority (FSA), has just raised the bar for investment advice and is continuing its practice of large-ticket fines to show that its teeth actually bite. A January 2011 FSA paper titled “Assessing Suitability: Establishing the risk a customer is willing and able to take and making a suitable investment selection” (http://bit.ly/fOb8by) lays out the results of an audit of advisory firms between March 2008 and September 2010. The report looks at the practical issues of implementing the suitability criterion in product sales and financial advice.

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The link between GDP growth and the broad market index

Expense Account, Mint

As I breezily recommend an index fund to anybody who is risk averse and still wants “better” return than a bank deposit, I forget to take into account a slice of the reader and viewer segment which does not know the assumptions or the formulae behind this sweeping prediction of the future that I like to make: Indian equity will give an average return of about 15%, year-on-year (y-o-y), over the next 10-15 years. You’ve heard this statement over and over again so often that it almost seems like a basic rule. But it takes a vigilant reader of the paper to ask the obvious question: what is the basis of this statement and if past returns do not guarantee future returns, how can we predict what the markets will do in the next few years? Writes Anantha Padmanabhan from Bangalore: “Today the economy is booming, however, over the next 15-20 years is it feasible to have such a year-on-year growth of the Sensex (and thus the economy)? Historical data over the last 15 years is fine, but going forward I am a little sceptical. What makes us say that the markets will give a 15% year-on-year return over the next 20 years?”

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Five things to do this February

Expense Account, Mint

February is no longer the same. A mixture of rising incomes, home loans and spending-linked tax-saving options (such as school fees) make the Public Provident Fund (PPF) and National Savings Certificate (NSC) investments more for continuation of the account rather than the need to get the Rs1 lakh 80C deduction. But the February habit is so strong that I find myself still fussing over investments at this time of the year, going through the routine of crediting the accounts and getting the passbooks updated. But where did they go? I left them right there in the green folder, has it chewed them up? Anybody who has moved them is so dead. Ha, there they are. When did the green folder become pink? And what’s this? My NSCs. Hello. These were dead three months ago—I need to make the trip to the post office. And, ah, that’s the cashless mediclaim card I was looking for. The scrabble for one set of papers leads to many other forgotten bits of paper and work. We all lead untidy lives—yes even the so-called experts—and need a periodic nudge to put things back in order again. And I take great solace from the story of Daniel Kahneman. But more of that later. This year I used the mental note firmly engrained in the minds of the Indian salaried that February means finances to do a financial housekeeping exercise. Five things to do this February.

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Lots to do for the sandwich gen

Expense Account, Mint

One of the nicest calls I answered on my weekly TV show recently was from a 20-something kid from the US who wanted to plan out her parent’s finances. Mum had retired, dad was going to soon and daughter wanted the best advice for her parents on cracking their retirement nest egg. As a proportion of calls and mails, I find a large chunk of callers worried about their parents’ future. Most of these are in their 20s, are not married and are very eager to give back to their parents in whatever way they can. What the well-intentioned 20-something kids find out when they hit their 40s is a little different. By now there are spouses, own kids and their own lives to lead, own retirements to fund and holidays to take. By their 50s they discover that it is no longer just money-linked issues that they need to deal with—it is ongoing care. A friend in his 50s caring for parents in their 80s talks of having more helpers in the house who take care of his ageing parents—both of whom need 24-hour care—than family. Another talks of the tough decision he has to soon make of either coming back to India, leaving a promising career, or convincing his reluctant parents to make the inter-continental, cultural shift. One road means a reworking of the nuclear family goals and aspirations, the other wrenches parents out from all that is familiar.

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