How to transform mis-buying /selling into a smart buying?

Are you completely satisfied with the financial products you have bought or investments sold to you? If your answer is No, is it because of mis-selling or mis-buying?

Mis-selling means that you were given unsuitable advice, the risks were not explained to you or you were not given the information you needed, and ended up with a product that is not right for you while mis-buying means buyers’ sheer ignorance towards the details and intricacy of the financial product.

There is this one example where one retiree and his wife went to financial planner to review their investment portfolio. To the planner’s dismay, he found out that apart from 32 mutual funds-most of them NFOs launched in the past 3-4 years and a long list of equity shares, they had endowment policies, Ulips and a pension plan. It is improbable the retired petroleum engineer and his homemaker wife understood the various charges and loads for these products before they bought them. 

So who is to blame in this case? Five relationship managers of 3 banks who sold all these things or the couple?

Unfortunately, all the financial products in India are not bought but sold. In addition, there are these 3 reasons behind that:

1. Some people buy to please a friend, neighbor or a relative even though neither the client nor the salesperson understands the product.
2. Another reason is ego. Customer’sego does not allow him to admit that he does not understand the product.He convinces himself that if a big organization is selling and the product has been approved by Sebi or Irda and it must be good.
3. Moreover, 3rd reason is that most big purchases are made without professional input, as customers do not know whom to ask.

Among all these financial products, Insurance is top rated. Still mis-selling of it is so common in India that our honorable finance minister once said, “because of this mis-selling, insurance is stumbling in India”.

In actual, insurance should be bought to protect your financial life from unwelcome surprises and to cover your family needs when you are not around. However, most of the time it is bought to save the taxes. Moreover, attention has not been paid towards the details like :

• Which type of cover it is providing? Regular income or lump sum amount post retirement or in case of death.
• Does this policy –cover suffice to your requirement or not? If yes, then how much cover at which premium it is providing?
• How much commission seller is getting through this deal?
• Last but not the least what are the exclusions under which your claims will not be paid?

This ignorance of lack of knowledge makes you a mis-buyer where your seller is already considered as mis-seller.

Generally, a very thin line is there between mis-selling and fraud and mutual fund is no exception to it.

I can recount one case related to this where a retired person was convinced to invest a large amount in an equity linked savings scheme.

When market crashed, he could not even cut his losses because his money was locked-in for three years. Whereas for a retired person, liquidity is essential. 

Can you tell who is who here? Either buyer is mis-buyer or seller is mis-seller?

Because

• Investor did not make enough enquire before approaching a seller for investment. He was not aware of the things like entry and exit load on Mutual Fund, then open ended and close-ended mutual funds.
• Distributor did not make him aware of these things (for his fat commission) despite of knowing his age and financial situation.

Therefore, there is really no end to the argument that buyer is mis-buyer or seller is mis-seller in case of financial products.

The way out: In general, practice manufacturers of financial products have a bouquet of offerings, which suits the company, the distributor or the customer. Given the complexity of financial products and the vast choice before him, it is not easy for a customer to know which product best suits his needs.

For that he needs to have a good financial advisor beside him who will decode the information provided by agent to you and enable you to choose the right option. Moreover, for that it is important that buyer learn that he needs a financial planner.

So, what are you waiting for?

The author is Ramalingam.K an MBA (Finance) and certified financial planner. He is the Director & Chief Financial Planner of holistic investment planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He Can be reached at ramalingam@holisticinvestment.in