How to protect yourself from becoming a victim of mis-selling
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Mis-selling is rampant in the financial services industry. While legislation may act as a shield in protecting the interests of investors, an investor can take care of the following aspects to minimize instances of mis-selling
I have come across many cases of mis-selling in the financial services industry but the Mangelal Sharma case came a shocker for me (Will this 79 year old's protest move the government and the RBI to stop mis-selling by banks ? Mangelal Sharma get his Rs. 7 lakh back. This was a case in which even an old man was not spared. Banks and financial institutions claim that customers are king for them but in practice they rarely follow this. Why do we have so many cases of mis-selling of financial products? Is mis-selling happening because there is dearth of legislations? The answer to this question is both yes and no. Though there are legislations in place to prevent mis-selling, these legislations hardly help investors. Also investors in many cases are not aware about how to take benefit of existing laws when they have become victim of wrong financial products sold to them.
Whatever is the reason, there are instances of mis-selling in which people lose their hard-earned money and repent thereafter. While legislation may act as a shield in protecting interest of investors, is there any alternate way in which an investor can prevent himself/herself from becoming victim of mis-selling? Though there is no magic wand to help an investor, s/he can take care of following aspects to minimize instances of mis-selling:
Never buy a product aggressively pitched by agents: It is very obvious that an agent or a representative of financial service provider pitches a product based on the commission or fee that he earns. So it is better not to get carried away by what he suggests. You need to understand your investment requirements and select product based on that. One more important point, even if the agent happens to be a family friend, ask him questions. You cannot leave your investments in other's hand. Products like life insuranceare often mis-sold by agents as investment products. Please remember insurance is a product having potential to cover risks.
Never buy a product you do not understand: The golden rule to prevent mis-selling is not to buy a product unless you have understood the product fully. New products keep on hitting the market from time to time. The most recent example was the Rajiv Gandhi Equity Savings Scheme (RGESS). Many investors bought this product because of the fact that this is a good tax saving option, without realizing the risk factors. In past, there have been many instances when Unit Linked Insurance Plans (ULIPs) were sold to investors. The main reason of this mis-selling was lack of understanding of products by investors.
If you are financially illiterate, there are two options. Acquire necessary skills to understand a product or approach a financial advisor. To me the first option looks better. In India, most of the financial products are plain vanilla products which an ordinary investor can understand. The problem with financial advisors is that most of them offer generic suggestions.
Have a check list ready: In order to understand the product, you need to look at facts such as the risk and return aspects of the product. In order to understand product, you can check out some of the details which are as follows:
· • Is the return fixed or subject to market risks? Most of time variable return products are mis-sold as a fixed return product. Variable return products suit people who are ready to take risk. Also, remember higher the risk, higher the return is an erroneous statement, higher the risk, higher the expected return is practical.
· • If a particular return is promised, ask for it in writing. It can also be in the draft document. You can also ask for reference of assured return in the draft document. The seller will admit if the financial institution is not offering the same.
· • Is there a lock-in period in the product and what are the exit options?Some exit options are simply impractical like mutual funds available for trading on thestock exchange.
· • Carry out special check for hybrid products which has carry high prospects for mis-selling.
· • Is the product approved by a regulator?
· • Is the capital protected in the investment made by you?
· • What are the charges? Ask for all details.
· • If there is any fancy return in the product, ask for its working. Get it verified.
· • Do not trust projections. If somebody tells you that a mutual fund will provide 20% return in future, you need to investigate. Projection is not a child's play and experts are proven wrong on this front every other day.
Keep greed aside: Mis-selling is easy if greed overshadows rational thinking. Many people invest their money in unknown financial products without understanding the product at all, as the greed of handsome return simply overwhelms them. So it is important that you never invest in products which give unbelievable returns.
Never buy financial products when the deadline approaches: If you are in hurry, you will have many worries later on. Never buy a financial product when the deadline approaches, especially the tax saving deadline. Think and plan in advance. Even if you have to buy any such product, buy conventional time-tested product such as PPF, NSC, etc.
Please note that you can mitigate the instances of mis-selling by becoming more vigilant and careful. Take care to ensure that you never buy what you don't need. Preventive measures against mis-selling need to be inculcated over a period of time.
(Vivek Sharma has worked for 17 years in the stock market, debt market and banking. He is a post graduate in Economics and MBA in Finance. He writes on personal finance and economics and is invited as an expert on personal finance shows.)
Bet Regards
Prakash Nair
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