When I was talking to a regulator,  he asked me “How come ULIPs (Unit linked insurance plans) charge such a high “entry” load? I told him as a distributor I can actually make more money from a customer selling mutual funds than selling ULIPs because of churn and a trail commission that is based on aum. He was quite stunned.

Frankly, I think some desirable fall out of this meltdown will be as follows:

Financial services will see a drop in salaries: Compared to useful industries like engineering, pharma, health, etc. the salaries in the financial services sector is too high. A big auto manufacturer will have say 20 people earning upwards of Rs. 50 lakhs (Rs. 5 million or about $ 110,000) per annum. However, even a loss making life insurance company which is at the bottom of the chain will have 20 people. This so called “shortage” of skill sets will disappear and salaries will come down to earth from the stratosphere.

Shareholders are still in the red: The life insurance industry may be charging the sun, moon and the earth for its products but companies are still in the red. The financial services industry broke one cardinal rule – the risk was taken (is being taken) by the shareholder, but the rewards are being reaped by the employee. Leveraging your balance sheet by a ratio of 40 will be done only by bankers with no morals or scruples. However in India we have seen “conservative” NBFC with a leverage of 10.

How the distributor is rewarded will change: Currently about 3% of the distributors may understand goal setting, budgeting, risk profiling, asset allocation, client servicing, etc. They have no guts to ask the client for fees – but they survive because the mutual fund and the life insurance companies are willing to pay him. This is not because they love him, but because they love the cheques that he brings! Hopefully paying commissions will be made unlawful – and the client will have to pay a fee for the services. This will ensure that many mutual funds, life insurance companies, and share brokerage firms will wonder how to live.

Penalty may be high: A big retailer from the South has defaulted on the Inter corporate loans and bank loans – to the extent of Rs. 25 crores. A big housing company which had a lot of short term borrowings -invested in long term loans – is finding it difficult to raise money. IN India such companies would have got away earlier – now they will find closure a serious possibility a la Citibank.

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