Mis-selling and poor advice continue to plague the domain of investment and insurance products. To make matters worse, a section of advisors/agents vociferously claims that the aforementioned don’t exist; others choose to justify the same by shifting the onus onto investors. Such trivialities notwithstanding, the ground reality is that mis-selling and poor advice are ‘clear and present’ menaces that investors routinely encounter.
Typically, by the time an investor realises that he has become a victim of mis-selling/poor advice, the damage has already been done. We thought it would be interesting to come up with a checklist of warning signals that can caution an investor of an impending investment/insurance disaster.
Now, we aren’t claiming that this list is an exhaustive one. Perhaps, it wouldn’t be possible to create an exhaustive list, given the numerous instances of poor advice rendered and the innovative mis-selling techniques deployed. But this can serve as a starting point for sure.
So here goes. It’s time for you to be cautious if your advisor
1. Only peddles forms and fails to offer advice
If your advisor is the kind who only approaches you for getting you invested in various avenues and offering advice doesn’t feature in his scheme of things, then there is a cause for concern. An advisor’s primary responsibility is to offer advice.
He is the one who should help you translate your investment objectives into monetary terms, lay out plans to help you achieve the same and get you invested in line with those plans. The advisor is also required to periodically review your plans and incorporate changes therein, if required.
While offering prompt and reliable service is important, offering accurate and unbiased advice is certainly an advisor’s core responsibility. And dealing with an advisor who doesn’t make the grade on the latter, could spell trouble for you.
2. Frequently churns your portfolio
Churning the portfolio is a term that investors in the mutual funds segment should be able to easily identify with. It means frequently buying and selling funds, especially of the equity variety. You can be sure that you are at the receiving end if most of this buying and selling is in NFOs (new fund offers).
Equity investing is essentially about investing for the long-term and if the advisor’s recommendations were correct in the first place, there should be little need for a churn. So an advisor who frequently churns your portfolio is either incompetent or has an ulterior motive i.e. to make more money by getting you regularly invested in NFOs.
For the uninitiated, NFOs fetch higher commissions vis-a-vis investments in existing funds, thereby making them more popular among advisors. While you bear the burden of the churn in the form of entry and exit loads, the advisor makes a quick buck at your expense.
The good news for the investor is that SEBI (Securities and Exchange Board of India) has taken concrete steps to curb mis-selling in NFOs and indications are that we are likely to see fewer equity NFOs going forward.
3. Attempts to entice you by offering rebates/kickbacks
Offering rebates/kickbacks is a practice wherein an advisor ‘compensates’ you for investing through him. For this he offers you a part of his commission earnings. The rebate/kickback offered is linked to the sum of investments.
Incidentally, the practice of offering rebates is explicitly prohibited in both mutual fund and insurance offerings. Without a doubt, if offering rebates is your advisor’s forte, then something is amiss. He is doing so to cover up his incompetence and it is in your interest to steer clear of such advisors.
4. Only emphasises on returns and ignores risk
It is not uncommon to find advisors, whose arguments (to convince clients about the merits of any investment) revolve only around returns with the risk aspect being conveniently ignored. Any advisor worth his salt will vouch for the fact that while evaluating the worthiness of an investment avenue, the risk-return trade-off is of paramount importance i.e. both risk and return need to be accorded equal importance. Furthermore, the suitability of the investment avenue for the investor in question needs to be determined. This in turn entails understanding the investor’s risk profile, needs and investment objectives. Clearly, there is much more to making an accurate recommendation than just evaluating the returns aspect. And any advisor who fails to do so, deserves a thumbs down.
Incidentally, a similar view was recently echoed by SEBI in the context of mutual fund advertisements. The regulator was of the view that the rapid fire manner in which the standard warning is recited in advertisements makes it unintelligible. Apparently, the practice of side stepping risk is not restricted to advisors alone.
5. Offers ULIPs as a staple offering for all your needs
This one’s for insurance advisors. Don’t get us wrong, we have nothing against ULIPs (unit linked insurance plans) or even with advisors selling ULIPs for that matter, so long as proper disclosures are in place i.e. the client is made adequately aware of the costs involved and other implications of buying a ULIP. In other words, the advisor should enable his client to make an informed decision.
However, all is not in order, if the advisor recommends ULIPs as a standard offering for all your insurance needs. It’s a well chronicled fact that term plans are the cheapest form of insurance; a term plan should ideally be the first insurance product that you must add to your insurance portfolio.
More importantly, the latter can play an important role in helping you achieve a cover that is in line with your Human Life Value. Of course, offerings like ULIPs and endowment plans can be added at a later stage.
So why do insurance advisors display a penchant for ULIPs? Maybe it’s the higher commission earnings in ULIPs vis-a-vis term plans that are driving the insurance advisor i.e. mis-selling.
On the other hand, maybe the insurance advisor just doesn’t know better i.e. he lacks proper knowledge. Anyway, being associated with such an advisor is an unenviable proposition for you.
As always, while this article has been written for the benefit of investors, there is no reason for advisors who go about conducting their business in an ethical and righteous manner to feel annoyed. We can only admire them for their resolve in the face of intense competition and tempting commissions.