Mis-selling of financial products is rampant, not just in India but across the globe and only you can stop the process.
Today, we'll give you some simple thumb rules you can use to judge whether your financial advisor or agent is doing his job right or not.
Who is managing your money? Your banker, your CA, or a financial advisor ? How sure are you of being in the right hands? Or do you simply trust him or her to do the best for you? Right now, most financial intermediaries and advisors in India make money not on the right financial advise they provide you but on the number of new products and high commission products they SELL you. So do they really have YOUR interest in mind? Or are they more busy pushing investments to earn commission. It is this dilemma which has perhaps prompted SEBI to propose a new variable commission structure for selling mutual funds. What does this mean for you? And is it the way forward to stop mis-selling of investments? That's the big question of the day.
BIG QUESTION: Is variable commission the solution to stop mis-selling of financial products?
The regulator has proposed a variable commission structure for mutual funds distributors. Will it work? And how will it?
We need to understand costs that financial products carry.
# Cost to get into the bus - entry load
# Cost to ride the bus - fund management fee
# Cost to exit the bus - exit load
The discussion here is about the entry load:
# SEBI rules allow a total front and back load to be 7 per cent of the investment or exit
# Market standard is now 2.25 per cent as the distributor fee, and exit loads are usually zero
# So on an investment of Rs 1 lakh, the distributor gets Rs 2,250
# This is something in which you as the investor have no choice
# Sebi's proposal as aims to make this a matter of choice
# You will be able to evaluate the advice and service and then compensate the distributor
# It can be deducted from your investment or you write a separate check
# Aim is to increase transparency for the investor
While the proposal is very good for the investor, there is a fear in the mind of the distributors and industry that this will only encourage more mis-selling of the 40 per cent load heavy investment products from insurance companies.
Mutual Funds : Variable Commission
What does it mean for you?
# Mis-selling of funds by agents will stop
# Today you pay 2.25 per cent from your investment as charges
# You will be able negotiate commission with your agent
# You will be able to pay agent separately based on his services
We think it is worthwhile checking how much loads really shave off your gains. Is the impact of costs really that big? Yes, it is.
Let’s say, you were to invest Rs 5 lakh for 10 years and the money grows at 10 per cent. If the load or costs of that investment is 2 per cent you will end up with a kitty of over 15.5 lakhs. What happens at a 5 per cent load? You would get 50,000 rupees lesser and be left with 15 lakhs. At 10 per cent load factor, you are down to 14.34 lakh. At 20 per cent costs, you're left with just 12.75 lakh rupees. And guess what at 40 per cent load - you actually end up with 6 lakh rupees less. What you get is only 9.56 lakhs versus 15.6 lakhs if your load was 2 per cent. So, load matters - big time!
Mis-selling is the most rampant because of the mouthwatering commissions agents earn, pushing ULIP and money back policies. How do you stop mis-selling there?
Right now, there's really no way out. Other than ensuring you're with the right agent or advisor. Figuring that out is quite simple. There are questions YOU should be asking the financial intermediary or advisor before engaging him. And they are:
# How much is your experience with managing other people's money? How long have you been practicing? How much experience you have?
# What are your qualifications - are you a qualified planner, or a chartered accountant, or at least someone who has the capability to understand numbers and different financial products?
# What is the service you offer? Is it a full plan with insurance, mortgage planning, tax planning or is it just portfolio management?
# How do I pay for your service? Do I pay or do you earn a commission on the products you sell me?
# Who will work with me? Will it be you or someone else from your team? Many a times you will have the senior more qualified people from a team coming to pitch to you and after that palm you off on to a junior rookie who understands little about financial planning or only pushes products to meet his targets.
# How many clients do you have? This is a very important question, especially if you are going with a smaller boutique firm or an individual CFP/CA
# What is your client retention average? How long does a client stay with you? And cross check to get references from existing clients.
How many times has it happened that the conversation with an agent begins with him either pitching a product or asking how much you have to invest. Both questions are signals that the agent is just pushing a product. To know that the agent has your financial welfare at his heart, look for questions like these:
# Where are you today financially?
Where you are going will depend on where you are today. To reach Chennai from Mumbai will be not the same as from Delhi. Unless the advisor knows how much you already have in investments, in which assets, what you earn today, what your spending and saving patterns are, how will he plan for the future?
# Where do you want to go?
For what do you want to invest your money? How far away is that goal? How much would you need for that goal are questions that tell you that the advisor is measuring the distance. Product choice will depend on distance of goal amongst other things.
# How much risk can you take? Unless the advisor finds out how much risk you are able to digest, he will be unable to recommend the correct product.
# Are you willing to work with me? Beware of an advisor who says: Mein Hoon Na. Run in the opposite direction. You need a person who is happy to answer your questions and spends that extra time to hand hold you into understanding financial products.
# Will you revisit the plan each year? Beware of an advisor who begins with: it is just a three year product and this is for your retirement. This is typically a sell and run agent. You want an advisor who will make you promise to come back for a regular visit and a total relook of the plan each year.
And of course if you're stuck with the wrong Financial advisor, you must get rid of him or her today. Here are the reasons why you should change your advisor today: your planner keeps asking you to stay away from any risk and stick to absolutely safe products or the reverse - he continues to push you to very risky investments promising very high returns. Both are not good. He needs to understand your risk appetite and recommend products accordingly.
Financial advisors should not be loading his life choices on you. Yes, he can tell you that you're missing your saving targets and need to buck up but cannot constantly make you feel guilty about taking a holiday or shopping. You won’t find too many of these kinds, BUT there are several who are ill advising you and there are simpler ways to judge that.
If your planner has recommended anything other than a pure term policy as an insurance coverage, he absolutely does not have your best interest in mind. And look in your portfolio - how many low return moneybacks and costly ULIPs are you sitting on? If the advisor keeps asking you to buy new mutual funds or you have more than 10 funds on his recommendation, dump him. He's not good - worse still if the agent keeps asking you to sell Mutual funds and keep shifting to new ones, definitely get rid of him. It is a sure way to know that he's gunning for his commission from pushing new investments rather than any interest in mind.
To end with, March 31st is closing in - hope all of you have put away basic investments for saving your taxes. And till next week...goodbye.