The concern over mis-selling of financial products to retail investors is rising and for good reason. Recently, HSBC Bank Ltd came under fire in India and globally for some practices that go against customer’s best interests. But this isn’t a first.
Taking official note of such activities, commonly termed as “mis-selling”, the capital market regulator, the Securities and Exchange Board of India, issued draft guidelines in August, which clearly define the role and responsibility of investment advisers and also differentiates between an adviser and a pure distributor. More recently, the Financial Sector Legislative Reforms Commission released an approach paper dealing with such issues. Among other things, this paper highlights the need for consumer protection and suggests a single financial regulator which will embrace the securities market, insurance, pension and commodities.
But there are gaps. For example, the above approach keeps banks out of the ambit. A few months ago Mint Money had highlighted that private sector banks are foremost in churning mutual fund portfolios, resulting in lower gains and higher expenses. While regulatory aspects will get tightened eventually, as a customer you can do your bit. So don’t blindly accept whatever comes your way as financial advice; learn to question, do a quality check and only then sign on the dotted line. Here are four questions you should ask your adviser and what you should do to sort yourself out.
Does your agent know you have a surplus?
If the bank where you hold your salary account is also managing your investments, there is a distinct possibility that your “adviser” or relationship manager knows your bank balance. In the case of actress Suchitra Krishnamoorthy, who has filed a legal notice against HSBC India, the bank’s officials contacted her after she deposited Rs.1.4 crore in her account in their Juhu branch.
If the only reason for an adviser to get in touch with you is a lump sum deposit or a hefty bonus in your savings account, it’s your first clue that the intentions may not be right.
The job of an investment adviser is not simply to allocate surplus money in different products, but to understand your financial objective and recommend products accordingly. This is irrespective of whether or not you have a sudden surplus to invest.
How does your agent earn his income?
If the adviser is employed by a bank or any other wealth advisory company, he probably earns a fixed salary and over that some incentives.
Typically, incentives are directly linked to the revenue generated from a client’s investment corpus. Given this, it’s possible that your relationship manager is motivated to earn as much revenue as possible for the bank/company and that may or may not have a link to how your investments are performing. As an extreme example, a high commission product such as insurance may look attractive to your adviser even if it does not suit you.
Instead, if your adviser earns a bonus linked to the performance of your portfolio, it may work better for you. This will ensure that the adviser sincerely works towards giving you products and solutions that bring you closest to your return objective.
Similarly, for an independent adviser, the key to your benefit is if the adviser charges a performance or a fixed fee linked to achieving your financial objectives. While some of you may feel happy if you have an adviser who is not charging any fixed fee, remember they also have to earn a living: this means ultimately you may get sold products that have high commission to facilitate the adviser’s earning.
Says Ashwin Parikh, partner and national head (financial services), Ernst and Young, “When we move away from commission to fees, the contractual agreement changes between the client and adviser. In case of commissions, it is clear that the agent is interested in his own income. Our market is in a stage of transition and this change will take time to pick up.”
Is your asset allocation in place?
Ensure that your adviser considers an overall asset allocation rather than individual products.
Financial planning entails doing an overall analysis of your objectives and drawing up an asset allocation, where your savings are split in a pre-determined ratio across assets such as equity, debt and gold. This is important because it considers how much risk you can take and determines the returns you can expect.
For example, if you are a low-risk investor, check your equity allocation—having too many unit-linked insurance policies (Ulips) tied into equity market will not help. Says Surya Bhatia, a Delhi-Based financial planner, “Doing an asset allocation helps know the risk-return framework and is a way to rebalance automatically in line with market movement.” For example, if you have invested 50% in equities and that has reached 60% because of a market rally, knowing your asset allocation will help in rebalancing the exposure back to 50%.
How often are products churned?
Once an asset allocation is put in place, the need for change seldom arises. Long-term assets need to be looked at or rebalanced once a year or at the most twice a year.
If your adviser showcases a new product almost every month and tries to fit it in your portfolio and asset allocation by replacing another, be wary. A good adviser will try to pace out your investments over a period of time and encourage regular investments keeping in mind your overall asset allocation. So if new and interesting products do come about, there will be space in your portfolio to accommodate those rather than disturbing the balance. Says Bhatia, “We will include a new product only if there is a compelling reason to change the existing allocation. But this doesn’t happen often.”
Work on yourself
Don’t let greed dictate your investments: Recently, a couple who ran a multi-level marketing scam called Stock Guru got arrested for duping nearly 200,000 people for an estimated Rs.1,100 crore. Those who were defrauded have a website called Stockguruvictims.com, which claims that people had invested money in the hope of receiving interest of 20% per month as promised by the promoter of Stock Guru. A 20% per month return compounded every month for a year will increase your money nearly nine times. If this would be true, everyone would be involved only in this business and nothing else.
When you are presented with an investment proposition that sounds too good to be true, think about where and how the returns will get generated. For any kind of returns there has to be an underlying investment and that can be in financial securities such as stocks, fixed deposits and bonds or in physical assets such as real estate and gold. Stocks and bonds are backed by actual businesses that are productive and that’s how a bond can give a fixed return. But if none of the above are attached to an investment proposition, there is something amiss. Money does not generate more money by itself. Always question how returns are generated and don’t let greed decide whether an investment is worth your while.
Be upfront: Your adviser can help you only if they know what you need. For that to happen, you have to talk openly about your financial matters. This means you have to discuss your long-term goals and reveal how much money you have, how much you earn, even what you spend every day and also how much debt you have. If you are not willing to discuss details openly, you can’t expect your adviser to give you the right product, solution or asset allocation.