This my fifth article on the nuanced concepts of investment risk for life insurance salespersons. (You can read all my previous articles and more in my Blog www.helpindiainsure.iistpune.in. The articles on investment risks are a available on this page link in the Blog https://www.helpindiainsure.iistpune.in/category/finance-for-life-insurance/). Life insurance salespersons will sell ethically and correctly, if the concepts of investment risks are understood. Each of the articles so far and the subsequent ones to follow will explore the concept of investment risk in all its nuances.
We also undertake the course Finance for the Life Insurance Sales Professional (FLISP). Click on https://www.iistpune.in/finance-for-life-insurance-sales-professionals-flisp/
Introduction
Let us suppose that there are a group of people (let’s call them Group A) who prefer taking investment risks. They believe that if one takes higher risk, the chances of earning more than the normal bank rate of interest is very high. Therefore, they seek out investments in mutual funds, ULIPs, equities and may be even cryptocurrencies. Let us take another group, Group B, who do not wish to take investment risks. They prefer post office savings, bank deposits, and traditional life insurance. Neither the members of Group A or that of Group B are wrong. To each his own view.
Risk Classes in Investments
In finance and investments these two groups are referred to as two different risk categories of investors. It is also referred to as two different risk classes. Very often, the justification to invest for members of Group A is quite different from those in Group B. Those selling investments should also bear this in mind.
The common sales pitch is that for any customer we meet, we tell the customer, that on so-and-so ULIP or mutual fund he can expect high returns. Is that what all customers want to hear? Group B customers will want to hear differently. It’s like telling a customer who wants to buy ice cream that he can buy milk (since the shopkeeper had milk available) and make the ice cream at home.
We may invest in land in the expectation that land prices will double soon. But we do not put money in a bank in the hope that our money will double in 3 – 4 years. A person investing in a bank fixed deposit knows that he may not earn more than the investor in land. This is not to suggest, however, that the person investing in land will always earn more than the fixed deposit holder.
In general, investors in one risk class will not invest in another risk class
A low-risk investor (the Group B category) will expect low and steady returns while a high-risk investor (Group A category) will expect high and uncertain returns.
A high-risk investor will not accept a low-return-steady-income product, such as bank deposits and post office savings.
A low-risk investor will not accept a high-but-uncertain-return product, such as mutual funds and equities.
For example, you meet a person who is convinced that he can earn more on shares. You tell him to invest in a bank fixed deposit. He will probably laugh at you. He will question you as to why he should invest for 7 % interest when he can earn 15 % p.a.
On the other hand, you meet a person who feels that he would like to keep his money safely in a bank. You suggest a ULIP Equity Fund to him. He will stay away from you.
Group A and Group B customers, on the subject of investments, think in a manner that is different from each other.
Investors choose their investment product on the basis of their risk preferences
This is an important understanding of the concept of risk behaviour of individuals. You have often asked yourself why a person should invest in conventional insurance if he is getting such high returns in the equity fund of ULIP. People invest in conventional insurance because they want to belong to that risk class not because they want low return. They do not want the risk class or the return expectations of a higher risk category such as equity funds of ULIP. Similarly, a person who is prepared to take the risk of investing in an equity fund of ULIP, will never buy a traditional insurance policy.
Sell accordingly
It is important to know the customer’s mind and thinking before suggesting ULIPs or traditional insurance. Even if a person shows an inclination to buy ULIP or mutual funds (because of the market and media hype) in the belief that he will get higher returns, it is important to know whether that customer belongs to the high-risk investor category or not.
Very often salespersons get prescriptive. They suggest an investment product and try to force that opinion on the customer. It should be the other way around. Take some time and trouble to find out the risk category the customer belongs to and sell accordingly.
This is what you will learn when you join the unique, tried and tested method of IIST’s Finance for Life Insurance Sales Professional (FLISP) course. Visit our https://www.iistpune.in/finance-for-life-insurance-sales-professionals-flisp/ to know how we can help.
More tips in my next article. Look out for regular articles on the concepts of risk. In the meanwhile, you may also visit the website (https://www.iistpune.in/) of The Institute of Insurance Sales Training (IIST) to know more about the number of ways we can help you reach great heights in life insurance sales team building and selling.