Have you ever thought about the tall claims made by your agents / distributors try to sell you products.
"Double your money in just 3 years". "You will get more than 25% returns if you invest in this scheme just for 3 years." Very often you must have come across these statements from your agents / distributors / relationship managers trying to pitch in some ponzi investment products, mutual funds, and insurance policies.
Have you ever thought about the tall claims made by your agents / distributors try to sell you these products. The answer is "No". Many simply get swayed by these tall claims in a pursuit of getting wealthier. But just think - are you really getting wealthier? Well, one person for sure is getting wealthier - and that’s your agent / advisor who uses these fabulous sales pitches. Your agent / advisor get luring commission for promoting these investment products, and so do the relationship managers through their variable pay (forming a part of their CTC).
Take for instance the case of the recent Citibank fraud. One of the relationship managers of the esteemed bank duped High Networth Individual (HNI) clients with ponzi schemes promising tall claims and embezzled investors' money by diverting their (clients') funds to his personal account. So, the relationship manager became rich (the unethical way), but the investors’ were duped.
And in our opinion, it is you investors' who are digging your own grave by trusting unscrupulous agents / distributors / relationship managers. Merely signing blank forms, leaving the job of filling the other necessary details to their relationship managers is in a way encouraging these scams to happen.
Please recognize that it is your money, and you as an investor have a complete right to check the details of the forms which your agent / distributor / relationship manager fills in for you. In fact if possible, make it a point to fill in the forms by yourself, rather than waiting for a horrifying event to unveil.
The Association of Mutual Funds in India (AMFI) has made the Know Your Distributor certificate mandatory for mutual advisors, which enables you to check the credentials of the mutual fund advisor whom you are dealing with. So, you should be insisting the advisor to show you a copy of the KYD certificate before transacting with him. Moreover now the regulators too - both the Securities and Exchange Board of India (SEBI) as well as the Insurance Regulatory and Development Authority (IRDA), have tightened compliance norms and emphasized on investor education, which is in your interest and for you to learn.
Remember your agents / distributors / relationship managers have the following reasons of doing things their own way (making them richer!), but it is for you to assess the tall claims made by them, so that you don’t fall prey to fraudulent activities (and be duped!).
Incentives: Every economic activity has the ultimate objective of generating revenues and making profits. But in our opinion enough responsibility has to be displayed in doing so - more importantly in the business of “investment management”, as agents / distributors / relationship managers (RMs) are like trustees of you investors. But unfortunately, the occurrence of scams (like the one in Citibank) reveals that such a trustworthy relationship is either taken for granted or does not exist. Why? Because your agents / distributors / relationship managers wants to make their own money and get richer. Agent and distributors are interested in their share of commissions, by sometimes mis-selling investment products (by making you invest in those schemes which are unsuitable to your investment objectives / financial goals); and so is the case with the relationship managers as they are interested in getting better variable pay. [In general, RMs have two kinds of components in their salary – one being the fixed component (which they get every month) and other being the variable component (which is linked to their performance in terms of business generated)].
One should deal with an agent / distributor / relationship manager who is interested in giving an honest advice keeping in mind your investment objectives / financial goals, and not those who are offering a “kick-back” on the commissions earned by them. Also the point of efficient after sales service and monitoring of your investment portfolio has to be considered.
Competition: Sales infuses life in every organization since the revenues flow in. And in the business of “investment management” too increasing Assets Under Management (AUM) reveals an upward trend in sales. Today every company in the financial services sector – be it broking houses, portfolio managers, mutual fund houses, insurance companies, are interested in increasing their AUM. And in order to do so, most such companies come out with new recommendations, new PMS schemes, new mutual funds, new insurance plans (which in our opinion aren't really new and unique); which in turn keeps the sales team busy (promoting such products), but that also infuses pressures on them thus leading to mis-selling.
Trust on the brand: Some financial services companies over the period of their existence build a strong "brand equity", (through the advertising campaigns) which leads to investors trusting them. But sometimes, as there is no vigilance or an internal control system to check how ethically the sales team is promoting the investment products, the agents / distributors / relationship managers resort to mis-selling, as they too are aware that you as investors are going to believe in the brand name.
Attitudes/Rationalization: Well, the attitude and the rationalizations of the agent / distributor / relationship managers also play a vital role, which in a way exhibits in what investment products he advises. So, if he thinks of his objective of being richer, he may sell you inappropriate products not suiting your investment objectives or financial goals, and earn a handsome sum through the commissions. And some of them justify by saying that if they don’t do it, someone else will.
Hence, it becomes imperative that you learn through the investor education initiative taken by both the regulators - SEBI as well as IRDA, read various articles on personal finance and deal with an agent / distributor / relationship manager in a more responsible and conscious manner.
Here are the "dos" and "don'ts" one must follow in order to safeguard yourself from unscrupulous agents / distributors / relationship managers.
• Choose your financial advisor with due diligence
• Read the investment documents carefully
• Read the features and benefits of the investment products, to assess whether they suit your risk profile and investment objectives / financial goals
• Carry out at least some basic research
• Ask questions to your agent / distributor / relationship manager which are relevant in context of your investment objective / financial goals
• Monitor your investments regularly to where tour investments stand and see whether they are meeting your objectives / financial goals
• Take sufficient time while doing your investment / financial planning
• Don’t have blind faith in your agent / distributor / relationship managers
• Do not always go with big brands
• Do not sign blank cheques / forms
• Get lured by "returns" (%)
• Look for ways of making shortcut money
• Invest money if others / relatives / friends have invested in such a scheme
PersonalFN is a Mumbai based Financial Planning and Mutual Fund Research Firm.