- Navin Punjabi, Assistant Professor & Director Placements H R College of Commerce & Economics, Mentor Board of Industry-Academia Partnerships
- The author would like to thank Kanika Jain a student of Third Year Financial Markets at H R College of Commerce & Economics.
Unless they are a certified professional or expert, only a few understand the legalese of financial contracts or the technical details of various investment products. Most rely on the advice of a financial advisor or planner, who may ignore the needs of their clients in favour of hefty commissions paid by the companies whose products they recommend. This commission culture has made the practice of mis-selling rampant in the industry. As a consumer and investor, financial literacy and awareness is critical to protecting yourself. Here is what you should look out for –
Understand the difference between a financial advisor and an agent
An agent is an employee of the insurance agency, bank or mutual fund hired to sell their products. Since agents are paid commissions based on the number of sales they make, they may not keep their client’s interests in mind and will sell the policy which will earn them the maximum commission. A financial advisor, on the other hand, is an independent consultant who counsels clients on a range of financial products to meet investment goals in exchange for a fee. However, the lines between the two professions have blurred over time, and there are several financial advisors who receive commissions from companies to push their products in addition to the fees they charge customers. As a result, investors must safeguard their interests by taking further precautions. The regulator is taking many steps to ensure there is clear distinction between distributors and advisors. However, the investor must take care and understand what he really needs a distributor or an advisor. Many agents are also excellent advisors who many a times walk out of a deal saying it’s not in the best interest of the client even though they might receive a commission for recommending that financial product.
Check the name of the financial product you purchase
Companies often have a number of different financial products with similar names. Agents and advisors often avoid using the full name of the product and may sell you an investment plan with ‘added insurance benefits’ when what you are buying is in reality a complex unit-linked insurance plan. Similar ruses include selling a term insurance for a house or a car with ‘returns’ or a ‘short term’ life insurance plan. Remember, life insurance is meant to be a long term product that protects your family and assets from unforeseen events in the future.
Ask for the company’s projected returns
When the agent or advisor sits down to demonstrate the returns of the financial product, make sure the calculation you are being shown is the company’s official illustration on their website or similar software, and not the agent’s handwritten calculation. In the latter case, agents often exaggerate the numbers to double digit returns in order to make a compelling case for the sale. If the agent does not have a standard illustration available, contact the company directly. However, do keep in mind that even company projections are often inflated and do not reflect hidden costs.
Read all documents and fill in the form yourself
Despite being warned by the disclaimers in advertisements, most investors do not read the accompanying documentation and leave it to their advisors to explain the scheme to them and fill the form. Reading all related documents informs investors of specifications that may have been overlooked in the sales pitch such as additional charges and lock-in periods, as well as ensures that investors understand the product they are buying. By filling in forms themselves, investors can minimise errors and see to it that agents are not bundling additional products with the scheme.
Look out for hidden costs
These include entry and exit loads for mutual funds, as well as brokerage fees, management fees, redemption fees and commission. The lack of cost transparency at most financial companies means that investors often end up paying for misallocation of funds by managers and lose a significant percentage of their hypothetical earnings, Hence, projected returns for financial products should not be taken at face value.
Remember, there is no compulsion to buy a product
Bank employees often aggressively pitch certain products alongside others, for example, insurance along with a loan or a bank locker, only if you invested in their fixed deposit. In such cases, there is a high probability that the employee is engaging in mis-selling. It is up to investors to know their financial requirements and stay informed. Certain products can be returned for instance, there is a 15 days free look period for an insurance policy for an investor if he feels the insurance policy is not what he expected. Thereafter he can return the policy within 15days from the date of issue during the free look period.
Know your rights
As of 23rd June 2017, the RBI broadened the mandate of the Banking Ombudsman Scheme 2006 to include the resolution of grievances arising from the mis-selling of mutual funds, insurance, and other third-party investment products by banks. This makes banks liable for the mis-selling of any third party products by their employees. Additionally, the banking ombudsman can pass awards of up to Rs 20 lakh (an increase from the previous figure of Rs 10 lakh), along with granting a compensation of Rs 1 lakh for the loss suffered by the victim in terms of time and money.
According to the amendment made by the RBI, the banking ombudsman can now oversee cases related to –
- Improper and unsuitable sale of third-party financial products
- Not enough transparency when the product was sold
- Nondisclosure of grievance redressal mechanism
- Delay or refusal to facilitate after-sales service by the bank
In case of mis-selling, customers must first register a complaint with the bank and wait for a period of thirty days. If the bank does not offer a remedy, the complainant can file a charge with the banking ombudsman. It is mandatory for each bank branch to display the address of the banking ombudsman under which it falls. The customer may register a complaint via an online or offline channel. This process is free and does not require the services of an advocate. The customer may represent their case themselves or through a representative. The ombudsman can refuse a case that is time-barred or already heard in another court.
Although the new RBI regulations act as a safety net, it is imperative for investors to educate themselves about the financial products they are buying and be aware of possible ploys by banks, agents, and other financial companies. The best way is to prevent yourself being mis-sold a financial product by asking the right questions. Some of the questions you may want to ask the sales person/ agent / advisor are as follows: –
1) What are the risk factors in the financial product?
2) How much commission will you get?
3) How has the scheme performed in the past 5years/10years?
4) What is the return one can expect? Is there any minimum guarantee?
5) Can I request for the detailed break up of costs in the product?
6) Can you compare the cost with some competitors?
7) Why should your product be bought over your competitor?
8) Can you show me an illustration of the returns expected in this product?
9) Is the illustration shown as per the regulatory norms?
The whole idea of writing this article was to make investors aware of the questions one may ask to protect or prevent any mis selling of financial products to them. The next article will deal with how to make a complaint for any deficiency in service or any mis-selling, whom to approach, how to approach.
Disclaimer – The view & opinions expressed in this article are personal and do not reflect the views of the authors employer or any other institution that the author is affiliated to. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment.