In a recent tweet, Nithin Kamath brought attention to a very pertinent issue: that of unclaimed assets across mutual funds and demat accounts (the accounts in which stocks, bonds and shares are held) due to the lack of a named ‘nominee’.
Typically, whenever an investor opens any type of new account - with a bank or investment advisor - a nominee is established. A nominee is a person who is designated to receive the funds or assets in that account in the event of the account holder's death. Nominations are not always mandatory across all types of financial assets, but they're highly recommended, so your assets don't end up in limbo or tangled in legal complications. Importantly - the nominee has no ownership rights or control over the account during the account holder's lifetime, but they have a crucial role in the event of the owner passing.
The statistics are indeed staggering: In India alone, somewhere between $60-100 billion of assets lie unclaimed across various financial avenues. 72% of individual investors have not established a nominee for their Demat account.
This got us thinking more deeply to understand the scale of the problem. So we did some research to find out the scale of these unclaimed assets and here’s what we found -
Source: Recovery,
Association of Registered Investment Advisers
And, Its a global issue...
The ramifications of neglecting nominations extend far beyond India. Every country in the world has its own reservoir of unclaimed assets.
As populations age and get wealthier, a global trend of unclaimed or “orphan” assets is emerging, which presents significant challenges to the financial services industry and regulators.
In the United States for example, unclaimed cash and benefits currently total around $58 billion. The United Kingdom reported $63 billion in lost assets in 2022, according to the Financial Times. Chainalysis estimates that a substantial portion of bitcoins mined, ranging between 2.78 and 3.79 million, remain unclaimed. This spans bank accounts, insurance policies, pension funds, and more.
The colossal sum of unclaimed assets represents the hard-earned money of countless individuals left dormant, lost in the labyrinth of financial systems. This is not accessible to their loved ones with many not even knowing that these investments exist.
This situation also presents significant challenges to banks, investment managers and financial regulators - who don't have consistent ways of accounting for these assets.
Even beyond considerations of mortality, assets lacking a designated nominee often cannot serve as collateral for loans, posing a significant hurdle to the expansion of investment-backed lending (eg ‘loan against securities’).
Decoding the problem
The underlying issue is quite simple - the majority of investors simply fail to nominate beneficiaries for their assets - either intentionally or because of a lack of awareness.
This does lead one to wonder what is behind this behaviour. Are we just massive procrastinators or is it something deeper - do we shy away from contemplating our mortality? It's a human tendency, I suppose. Cognitive biases often shield us from confronting uncomfortable truths, and the inevitability of death is perhaps the greatest discomfort of all.
As Zig Ziglar aptly put it, "Money isn't the most important thing in life, but it's reasonably close to oxygen on the 'gotta have it' scale." Yet, our aversion to discussing mortality - especially with our loved ones - blinds us to the critical importance of safeguarding our financial legacy.
So, What is being done about it?
Regulators are intensifying their efforts through awareness campaigns and policy interventions. For instance, In India, insurers must now disclose unclaimed insurance data on their websites, though a centralised database is still lacking.
The RBI has introduced a portal to trace all unclaimed deposits, and a similar tool for unclaimed securities is likely in the works. SEBI has made nominations mandatory for mutual fund investors; failure to nominate could result in freezing investments. Additionally, Finance Minister Nirmala Sitharaman and the RBI have periodically stressed the importance of nominations.
We have also seen some banks launch awareness campaigns with (perhaps irritating) push notifications and app pop-ups reminding people about nominations.
A more effective strategy would involve mandating insurers, mutual fund managers, etc., to educate customers about nominations, with regulators imposing penalties for incomplete nominations. This ensures customers are aware of their options and responsibilities without unfairly targeting any specific party.
What role can technology play?
Yet, relying solely on regulation is akin to treating symptoms without addressing the underlying causes. We need a multifaceted approach that combines regulatory measures with user-centric, tech-based solutions.
Enter Unified Nominations Registrar (UNR), a potential game-changer in streamlining the nomination process. By centralising nominee data across different asset classes, UNR promises a frictionless journey towards securing financial legacies. The Account Aggregator network provides an excellent platform to implement UNR.
Digital innovation holds the key to broader accessibility and engagement. User-friendly interfaces can nudge individuals to review and update their nominations periodically, ensuring their financial wishes are always up-to-date and easily accessible.
Fintechs like Nigeria-based Cova, or South Africa-based BenX are already pioneering solutions to bridge the gap between assets and beneficiaries. By offering a unified platform to track, manage, and transfer assets seamlessly, these fintechs empower individuals to take control of their financial destinies, even beyond the grave.
The Reserve Bank of India (RBI) announced plans to develop an AI-powered search portal to assist depositors in locating their money across multiple banks.
Tackling the mammoth challenge of unclaimed assets demands concerted efforts from governments, financial institutions, and tech wizards. We must leverage digital public infrastructure and regulatory frameworks to digitise discovery, verification, and repayment processes – unlocking millions of dormant funds in India alone.
Do you know of any startup solving this in India or the world? We would love to get in touch.
Also, what do you think can be a good solution for the issue? We love to know what you think!
