Mis-selling in financial products – There is nothing new or uncommon in this. Yet we often fail to realize this – or realize it after it is too late! It is not uncommon to hear stories where people bought product because a friendly uncle or friend or bank’s relationship manager (RM) or investment adviser suggested.
There is no one size fits all in financial planning. Each of us has different needs & requirements in terms of what fits our needs. However, most of us are probably semi-aware of our needs.
Probably we haven’t given enough thought. Or maybe, we are just unaware. This provides a fertile ground for several financial advisers and relationship managers to push products – products which fit their needs (commissions/ targets) rather than customer needs!
What are some common mis-selling in financial products?
1 – Random life insurance plans – Endowment plans, money back plans or ULIPs
Random insurance plans are arguably the most mis-sold financial products in India (and maybe in many other countries too!). Most of these insurance plans are sold on the back of:
- Good returns (Market linked or assured returns/ market linked pitched as assured returns). In may of the cases, these returns may not match bank deposit rates!
- Insurance cover – Which may be woefully less! (Related – How much term insurance cover you need?)
- Tax saving instrument – No wonder, majority of insurance product sales happen during last few months of la financial year!
Most of these insurance products are either endowment plans, ULIPs (Unit linked insurance Plans), money back plans (or variations of these plans) etc. These are the products that benefit agents more than the customers! (Most of these agents cringe on hearing term life insurance – because commissions are low!)
As most unbiased financial advisers advise – Don’t mix insurance and investments! You end up doing injustice to both!
2 – Random loans – many of which are unnecessary
Many people take loans because they need money – fairly obvious. At the same time, many are sold loans. Some of the cases include:
- Get a home loan. Because they are given arguments like – real estate always appreciates/ you will at least have a house etc. Or just to save taxes! (save some tax buy committing to buying a big house!)
- Get personal loans or car loan even when you can afford – because, stock markets give “Assured” 12./ 15 /18 (or whatever “put a good sounding number” percent) returns. That way, even if affordability is not an issue, people may end up taking loans! (Not uncommon to find such examples)! (Related – What is virtual debt)
- At times jargons like “interrupting the compounding process” are used if someone wants to withdraw from investments rather than taking a loan. (Most of us neither understand nor bother do review the calculations!)
Beware of loans. Especially when you don’t need it!
3 – Mutual Funds – As an investment that gives “assured” returns
Equities and equity based mutual funds usually form a good chunk of any financial planning advice. And why not? They have done well and have given good returns in past – and hopefully, will continue to do so in future. But there is no guarantee.
However, many advisers underplay the risk and sell “mutual funds” as something with assured returns. (they may be right eventually, but the risk nevertheless exists!).
And they usually get good commission too by selling mutual funds!
Pessimistic it may sound, but there are many things that can go wrong – companies may get disrupted by new technologies/ company, economy may have major crisis, earnings of company may suffer, there may be political uncertainty and what not!
While it is good to be optimistic about future, one need to be pragmatic too – and be aware of the risks too. Mutual funds can potentially give good returns over long run, but nothing is “assured”.
So, one may do well to diversify a bit (have some money allocated to capital protection) and avoid debt while investing in mutual funds!
4 – Debt funds – A “risk free” alternative to bank deposits
As recent crisis in NBFC space (DHFL/ IL & FS) has shown, it is a misleading statement. There are things that can do wrong – interest rate fluctuations and defaults. Few defaults exposes your initial capital at a risk!
While debt funds potentially offers slightly better returns than bank deposits (and a tax advantage too!) and a good shot at capital protection, be aware of the risks too.
5 – Misleading Stock tips helping you get rich quickly
Who doesn’t want to get rich – an that too quickly?
Most of the people who want to get rich quickly, form a good hunting ground for shady operators to peddle some random stocks. Like some random phone call suggesting an unknown name which “will become a sure-shot multibagger!”
People following these tips usually end up losing money.
In addition there are many “experts” who keep peddling stocks (and futures/ options) thus enabling people get rich quickly )or so it seems!). They are usually found on televisions and newspapers and different websites and even your friend circle!
They may be genuine experts or masquerading as experts, but following them blindly may increase your risk of permanent loss of capital.
Be aware, and avoid blind following. Use your own judgement while making such investing decisions!
Partial and/ or misleading information is the hallmark of such plans which are mis-sold. Lack of documentation or written assurance are another common features of such missold features. So is underplaying the risks!
Some more vigilance from customers and more understanding of how that investment works, along with asking some right questions can help you avoid falling prey to mis-selling in financial products!