Save Yourself From Mis-Selling - With These 3 Simple Questions

It’s an all too common story – you walk into a bank to request a loan or to book a fixed deposit. Once there, the branch manager accosts you energetically and forces you into a fruitless life insurance plan. Only a year later do you realise that you’ve been sold a ‘lemon’, to borrow an analogy from the world of automobile sales. Sadly, most individuals over the age of forty in our country have made at least one regrettable mis-selling driven investment decision in their life; and the rampant practise continues unabated within harsh, target driven sales environments in many banks and financial services firms across the country. If you’re on tenterhooks every time you speak with your bank relationship manager, simply know that you can save yourself from the bane of mis-selling by asking these four questions the next time.

Question #1: What do you earn by selling me this?

When you visit a supermarket, do you buy stuff without checking what they cost? Of course not. However, when it comes to financial products, we tend to buy products without knowing the price that we’re paying for them, because costs are embedded as commissions. Here’s a thumb rule – the higher the cost of a product, the worse it’s for you, for two reasons. One, high costs directly hit your future returns – after all, it’s nothing but a portion of your money. Two, the high costs on offer itself are a red flag; as intermediaries are typically incentivised at higher rates to sell poorer, more complex products that aren’t the best solutions on offer. Don’t be shy – ask this question boldly. It’s your right to know!

Question #2: What are the risks involved in this product - exactly?

Scour the internet for just ten minutes, and you’ll find dozens of horror stories of investment products not being represented properly, from the perspective of their intrinsic risks. Balanced funds being sold as guaranteed dividend products, ULIP’s as fixed deposits that’ll magically double your money, and so on and so forth. Even bonds are being mis-sold nowadays, as investors aren’t being made aware of the default risks, interest rate risks or downgrade risks that many of them carry. Here’s a simple tip: ask your ‘Advisor’ to put all risks in written, in an email. Don’t be surprised if that email isn’t forthcoming!

Question #3: Why are you recommending this and not that?

Sometimes, your antennae may go up because your ‘Advisor’ is fixated on one particular investment product. It may be a particular mutual fund scheme, a particular type of insurance plan, or a particular bond issue. Remember, there’s an ocean of alternatives in the retail financial services market and you have the right to know why your Advisor is recommending fund A over fund B. If the arguments come across as half-baked and not backed by sound logic, the advice is likely coloured and not conflict-free. It would be in your best interests to give the recommended investment product a wide berth in such a case.