In today’s Finshots, we offer a simplified explanation of how SEBI’s involvement in the Account Aggregator framework could be a gamechanger for this country.

The Story

Imagine you wake up with an epiphany one day — you need to get serious about managing money. You’ve dabbled in investments before and have a few stocks and mutual funds lying around. But you don’t have a clear plan. You don’t know whether you’re doing enough to meet all your goals. So you approach a financial advisor to help you navigate this mess.

But the financial advisor can’t do their job well unless they know more about you and your past transactions. They want to study your investments and your behaviour. And you’re equally excited. You can’t wait to show off the excel file that you’ve so painstakingly put together. You tell them it’s all there — in a beautiful spreadsheet.

But as soon as they take one good look at the file, they sigh in exasperation. They tell you that the data isn’t consistent. There’s no transaction history and nothing about your investment pattern. It only has a few odd values cobbled together at the end. It’s not very useful.

They need to know more about you. They need to understand your risk profile. If they asked you directly, you'd tell them you’re relatively risk-averse. But what if your investment pattern proves otherwise? What if you’re taking punts on risky stocks to double your investment every second chance you get? Needless to say, they can’t trust you. They need to see the data.

But this is annoying no? You have to do the grunt work all over again. You wonder if you should just share the credentials with them. But that’s too risky. What if they misuse it? So you go about compiling this data yourself.

Unfortunately, your data isn’t aggregated in one single place. It’s spread across many websites, in silos. For instance, your bank has access to your savings account information and the transactions you’ve made using this account. Data about your other investments are tied up elsewhere — mutual fund aggregators, mutual fund houses, etc. Your insurance company has data related to your annual premium payments. And that’s locked up somewhere else. In essence, there’s no way you can access your data from a single touchpoint. You would have to manually put all the data together on a shabby and confusing spreadsheet.

But what if it didn’t have to be this way? What if you could have a central touchpoint where you could access all your financial information at the click of a button? Well, that’s what Account Aggregators (AA) will try to do.

They’re third-party entities regulated by the RBI and they’ll be the intermediaries facilitating this grand program. They’ll connect “financial information providers” (FIP) like a mutual fund house or a bank to “financial information users” (FIU) like the  financial advisor we’ve described earlier. And it’s up to you to decide whether you want to let this happen.

If you’re still struggling to process all of this, let us break it down some more.

1. The FIU or the financial advisor will place a request to the AA and ask them to share the relevant investment information — this will include the latest, real-time data
2. The AA will check with the user (you!) through a mobile app and seek your consent before sharing the information
3. The user can decide what information they want to share and inform the AA accordingly
4. Once the user gives consent, the AA will get in touch with the FIP or the mutual fund companies and ask them to share all the investment details
5. The FIP will transfer the encrypted information to the AA. Which then passes it along to the FIU (your financial advisor)
6. The AA is just a tech-pass through and will have no access to the information on its own

Voila! Your financial advisor has all the information they need. And no one needs to break their head over creating new spreadsheets.

Now if you’re wondering where account aggregators have been hiding so far — Well, know that there’s a group trying to bring everyone together. After all, account aggregators can only do their job if financial information providers (like mutual fund companies) are willing to share the data. And this is easier said than done. You have to work with multiple entities. You have to deal with multiple regulators. And while many banks and NBFCs have already joined the framework, other participants have been more reserved.

So the fact that SEBI has joined the account aggregator is big news. They could now nudge stockbrokers and mutual fund companies to be a part of the account aggregator framework as well. This alone could expedite adoption and make Account Aggregators more mainstream.

This could be the next big revolution.

Until then…

Ditto Insights: Regular term insurance vs term insurance with ‘return of premiums’?

A regular term insurance plan can sometimes seem like a waste of money. For instance, you could buy a policy, pay your premiums regularly for 30 years, and then walk away without receiving a single penny in return. Because, as you know, term insurance policies only pay out if the policyholder passes away during the policy term. So if you live long enough, you may not get anything at all.

But some insurers devised a neat trick to minimize regret. They promised to “return all your premiums” if you outlive the policy term. They called it TROP — “Term Plan with a return of premium.”

‘Death or no death, you’ll get some benefit’. Makes quite a good first impression, doesn’t it?

But there is no such thing as a free lunch. For one, they return your premium at the end of the policy term, by which time inflation would have rendered this sum to a pittance. It wouldn’t be worth anything.

Also, these plans are more expensive when compared to regular term plans. And if you were to invest the excess sum in equities, for instance, you could make more money yourself than what the insurance company would have offered by way of returning your premiums.

Finally, remember that insurance companies will never give away money unless they already stand to gain something in the process. And if they are promising to return all your premiums irrespective of outcomes, don’t you think they would have made more money in the process?

Our calculations seem to suggest that they do. So if you’re buying a term policy, maybe consider buying a plain vanilla product. And if you need any help deciding which one, you can always talk to us at Ditto.

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