Four Wealth Management Traps To Watch Out For

Guaranteed Returns

The lure of guaranteed returns is something that very few investors can resist, and some unethical money managers have been quick to cash in on this in the past. Investments like junk bonds, real estate PMS’s, structured products, and even ULIP’s have been mis-sold as guaranteed return products to unsuspecting individuals. In one case that made the headlines a few years back, investors were promised guaranteed returns of up to 20 per cent from what seems to be a real estate PMS. Remember the simple thumb rule: it’s impossible to guarantee returns that are above the risk-free rate or the yield on the government security of a corresponding maturity. If your wealth manager is promising you otherwise, give the product a wide berth. Did you know that even bank FD’s aren’t guaranteed, in the event of a bank insolvency?

Large Ticket Insurance

Beware - you may come across someone who tries to sell you a large ticket life insurance plan. After all, these value eroding products carry fat commissions. These products could, prima facie, look really appealing – and could take the form of ULIP’s, endowment plans or even pension plans. Things like guaranteed additions and loyalty bonuses just add to the lure. By the time that the poor investor comes to his senses, he’s typically locked into a vicious cycle of throwing good money after bad. The lesson: if your wealth manager is pitching you any insurance product outside of traditional term insurance, it’s time to be on high alert.

100% safe and secure

There are many unfortunate stories of “100% secured” investments that were sold to clients, which were actually far from secure. From high yield bonds to structured products, to ULIP’s, many a guileless investor has been saddled with such investment products in the past. It’s a smart idea to deeply question any investment product as “100 per cent capital protected” by your wealth manager. Trawl through the fine print and understand whether this is indeed correct – and if it is, who is guaranteeing the capital and what is their creditworthiness? More often than not, you’ll uncover facts that differ from the pitch presented to you.

Exotic Products

If your money manager keeps coming back to you with the “flavour of the month”, it’s because most wealth management outfits are heavily product target driven, which means that any product that the management “approves for sale” must necessarily be sold to clients by the teams that exist further down the chain of command. Of course, the average wealthy investor’s obsession with all things not plain vanilla naturally helps their cause. Whether or not these exotic products (such as derivative PMS’s, structures currency pair linked products, real estate funds, private equity funds, cinema funds and the like) actually end up delivering real value is always open for debate. Stick with the simple with the core of your portfolio, and you won’t regret it in the long run.