We’ve said it before and we’ll say it again. Every individual investor needs to educate himself / herself.
You can not rely on somebody else, including your bank Relationship Manager (or especially your bank RM), to act in your best interests.
As ‘Yours, Personally’ readers know, there’s a little box at the bottom of your newsletter which asks you to write in to us if you’ve had any experiences of mis-selling.
You have shared your experiences with us, and out of all these experiences – all of which served to enforce our belief in investor education, one of them stood out from the rest due to its total lack of ethical conduct.
(confidentiality has been maintained, no names or specific details are disclosed)
This is what our reader wrote in saying:
“This is the norm - by bank executives out to meet their targets – ABC Bank & XYZ Bank (both among the top leading private sector banks) both have on numerous occasions tried to con me and my wife into buying ULIPs claiming that these are like FDs where you need to invest for 3 years only (now 5 years) for excellent returns; even dissuading us from investing in their own bank FDs! SO far we have escaped because I am a banker myself and a regular reader of PersonalFN - so understand some tricks of trade...
On two occasions when my wife refused after checking with me over phones, they *from one of the leading private sector banks referred to earlier* even went to the extent of suggesting her that she is an independent professional and she should take independent decisions without consulting with her spouse - as if the bank has better interest of the lady in mind rather than a spouse of over many years (at that time)...
But even our carefulness has not prevented us from being bagged with loads of endowment policies from our *leading PSU insurance provider* insurance agent (he happens to be a relative).
Wiser from PersonalFN analysis, and upon availing a housing loan, when we requested for a pure term cover of Rs.50 lakh, we are still waiting for feedback on underwriting of this pure term cover from the earlier stated insurance company, since past 6 months - standard agent response being that there is no news. In contrast, we used to get 'prompt' feedbacks when endowment policies were requested.
*A valued reader*
We would like to say something to you, sir.
It is a very good thing that you’ve educated yourself enough to withstand the varied tricks used by unscrupulous RMs and other “advisers”.
When dealing with someone’s hard earned money, which people have earned in order to provide a good life for their family and loved ones, one would imagine it is with only the highest form of ethics that an adviser would behave, but from what we have witnessed, this is often not the case.
There’s no point in complaining about the problem and not finding a solution, and the best solution in this particular situation is for the investor to educate himself. And this is what you have done – kudos to you!
Educating yourself is not at all difficult.
To help you, here’s are 3 simple guidelines – certain things you should keep in mind about investments in general:
Guideline 1. Know the Asset Class, not just the name of the product
If you’re buying a ULIP (which we do not recommend), at least know which option you are going in for. ULIPs come with options – the money you pay as premium goes partly towards life cover and the rest towards investment into one of the available options. The available options will include a pure debt option (this will be around the theme of capital protection, it will give you low returns), a mix of equity and debt (a hybrid option – this will be around the theme of capital protection with better returns) and an aggressive option where the investment will be primarily into equity. Costs are high of the ULIP as a product, this is something to bear in mind. Every 0.50% cost eats that much into your returns.
If you insist on buying a ULIP thinking that it will give you excellent returns, don’t opt for the debt option – there are no excellent returns here.
For all investment products, don’t just ask for the name of the product or the type, find out which asset class it is – equity or debt, or both, or gold, or a mix of all 3.
Guideline 2. Have a Purpose – don’t just invest because you have the money to spare
Know why you are investing – it will help greatly when you’re dealing with an adviser.
As long as you know that you are investing for a goal that is 2 or 5 or 10 years away, you can, on your own or with the help of an unbiased financial planner, decide which asset class is the better one for the goal in mind.
If the goal is less than 3 years away, try and avoid going for equity. Markets (and the macro or micro factors that affect them) are not always predictable.
If you’ve got more than 5 years for your goal, you can weight your investment more into equity and less into debt and gold. These are simple thumb rules and you can broadly structure your finances by these.
Guideline 3. Know the Costs of the Product AND the Remuneration to Your Adviser!
On a personal note, your newsletter author can tell you that when bank advisers have been asked about the commission of a product, they conveniently talk about the costs instead.
Costs of a product are the costs that are in-built into the product itself, these are the costs that will eat into your returns. It’s better for these costs to be low so that your returns are not affected. Costs earn your adviser nothing – they are product related and don’t make your adviser any richer.
Charges or commissions are something else entirely. Charges / commissions are what your adviser earns by recommending that product to you. This is what you should be asking about.
And if your adviser tries to talk to you about costs instead, repeat the question and explain yourself – ‘What is your company earning by way of commissions if I take this product?’
Most products have some commissions attached, so this is not always a bad thing – but it is important for you to be aware of them, at the very least. It will show you how biased or unbiased your adviser really is – and this is the crux of the matter.
So, follow these 3 simple guidelines and you should manage to save yourself from being fooled by an unscrupulous agent.
And remember, knowledge is power.
Keep reading, keep educating yourself, and always, always choose an unbiased adviser.