Have you been recently duped by an agent / advisor ? This is something which is so common in India. I was personally also fooled into an Insurance based investment product (ULIP) by my relationship banker of a reputed bank in India. I needed an investment option and I was sold a ULIP. All what I could see continiously depleting investment giving me nothing, though giving my relationship manager his much needed bonus.
Irrespective of how reputable or trust worthy a financial advisor is, you must always keep a lookout for the following warning signs which would give you an insight on something fishy being advised to you :
1. Dealing in a Single Product – An advisor knowing or pressing his client for a single product is perhaps looking forward for the juicy commissions which he may get from selling the product. If you get such an advise, try asking for other competitive products available in the market which you could opt for. If your advisor says that there are none, alarm bells should rise in your mind. There is perhaps no financial product in the market offered by a single company which does not have an alternative competing product. For example, I would feel very negative for an advisor who would try to sell me a Term Insurance from Company A mentioning that there is no other company selling such a product, where we all know that there multiple providers of the same product !
2. Churning your entire portfolio – In many cases we often approach a financial advisor to get our portfolio reviewed or strategised towards our financial goal. If as a result of this review, the advisor suggests to liquidate all of your portfolio and switch your investments into a very few list of products suggested by the advisor, you must challenge the rationale behind it. It may be possible that your selection of mutual funds or stocks may be structurally screwed up and may not achieve your financial goal. However, unless this is a case, it may not always make sense to completely liquidate your holdings.
3 Seller rather than Planner– Do you feed that every time you are talking to your financial advisor, he is pushing you to buy some or the other product rather than concentrating on your query ? It is not a good signal. A Financial advisor’s first priority is to concentrate upon the query of his client rather than on selling a product which shall get him commission income.
4. We Recommend the Products which we can sell – It is very common that the financial advisors also act as distributors for financial products such as insurance, mutual funds, ULIPs, etc. You might have a feeling that as an after maths of your financial planning, you are being only suggested financial products which are being distributed by your advisor. This should raise questions in your mind about other products which are not being distributed / sold by your advisor. Ask him questions about why doesn’t he recommend products which are not being distributed by him.
5. Sharing of Gains – This should be a strict No No for you. Financial advisors have different charging models such as a fixed fees, percentage fees of the overall portfolio, etc. However, there are some out there who charge a percentage of the gains on the portfolio. You must challenge all such advisors as charging a percentage of your gains is not reasonable and normal in the financial advisory space. A polite way to challenge such advisors is to ask if they would be willing to share a percentage of loss on the portfolio !
6. Hiding their fees – No one likes to share their source of income. However, if the source of income of a financial advisor is based upon what products you buy, you have a right to know what fees / commissions does your financial advisor get from the products you are being suggested to invest in. Such commissions / fees may provide some valuable insight on the appropriateness of the product for you. Generally outrageous commissions over 10-15% should be challenged by you considering SEBI is on its toes to reduce the amount of commissions being charged on financial products from the investors.
7. Power of Attorney – Is your financial advisor asking for your power of attorney (POA) to execute transactions on your behalf ? Hold on ! Unless there are compelling reasons such as regular transactions which makes it very difficult and logistically challenging for you to execute such transactions in person, I would strongly discourage you to hand over your POA to your advisor. It is like providing a blank cheque book to your advisor. Nothing prevents a POA holder to misuse your POA to his advantage !
8. Lack of Transparency – What ever your financial advisor is doing for you, it demands complete transparency. Every penny going out of your bank account today or in future counts towards your financial plan. You should get full details on how did your advisor arrive at a conclusion to invest in a particular option. Things should not sound complex – every thing is logical !
9. Urge to act quickly – You have to accept the offer / insurance policy today else the offer shall lapse ! Seriously ? Unless you are intending to invest in a New Fund Offer, IPO, etc., offers which shall expire if you don’t accept within 1-2 days are mostly shams and are intended to put pressures on gullible investors so that they do not get sufficient time to do market research which may provide them more insights on why not to invest into the product suggested by the advisor.
10. Unrealistic returns – How much return can I expect with my mutual fund investment portfolio ? This is the most common question asked by investors. And it is here where they may be cheated the most ! If you get a response which sounds to good to be true – challenge your advisor ! For example, if you are said that for an Equity Mutual fund your funds will double by end of the year or in 2-3 years, you are certainly with an advisor who either doesn’t know about the reality or is trying to fool you to invest in a product so that he can make his commission income.
I hope the above points may help you to be more alert and question your advisor should you come across a situation where your financial advisor may be intending to profit from your finances without any direct or indirect financial benefit being delivered to you.