5 reasons to question finance agents
Your agent could present himself as an advisor, but you should always remember that he works for a commission. Always double-check his actions to ensure you’re not being swindled.
Personal finance isn’t at all a difficult subject, yet many of us stay well away from it. While excelling at it may be next to impossible, it’s fairly easy to avoid amateur mistakes. All you need to know is the basics. Without a fair understanding of the basics, though, there’s every chance that you will turn yourself into prey for a crooked agent. It’s unfortunate how it works, but, as they caution you in the ads, you should read the offer document carefully before investing. Here’s what you need to beware of while dealing with an agent.
Financial literacy is unfortunately very low in India. Many of us, in fact, only think about investing during tax-saving season. But it’s not as if we won’t let agents talk us into buying what we don’t need. Investing requires knowledge of your current personal and professional situation. Without this information, no one should recommend you buy one product and not another. There is no one-size-fits-all investment product. If an agent tries to sell you a financial product without understanding your background and your financial goals, it would most probably amount to mis-selling. So don’t ever mistake them for financial advisors. Do your own research. Agents work on commissions and don’t get paid to manage your finances. Typically, they work (on commissions) for perhaps one or two insurers, sell mutual funds and maybe company FDs. They only have an interest in pushing these products.
Misrepresenting risky products as safe
Financial advertising, brochures and documents are often misleading. They always project a happy, prosperous future for you. Agents duly fill in how the scheme will achieve this anyway they please. There are numerous cases wherein risky products have been sold as completely risk-free. Recently, it came to light that an HDFC Crest plan, which is a ULIP, was being sold as a fixed deposit. This wasn’t one agent operating in a dodgy manner. This was reported across India. Similarly, agents are regularly pushing people to invest in equity mutual funds even though they may not have the risk appetite for it.
Churning mutual fund investments
Mutual funds are long-term investment tools. You analyse what you need and unless the scheme is consistently under-performing, you stay invested until you believe you have reached your financial goal. Some agents, however, may wish to churn your portfolio, which means regularly selling one fund and putting the money into another, thereby pocketing fees on two occasions.
High upfront insurance commissions
The biggest risk to consumers from agents pushing financial products comes from insurance distributors. This is because insurance schemes are long-term, lasting as long as 30 years, which means there’s profit to be made by the insurer for three decades. Therefore, they’re willing to pay their agents up to 35% in commissions in the first year alone. Now remember, this comes out of your investment. If you invest Rs1 lakh this year, only Rs35,000 could just be taken out as a commission to the agent. Commissions are highest in endowment and whole-life schemes, followed by unit-linked insurance plans. These schemes have varying degrees of risk, but all of them suffer from one fundamental problem: their costs are so high, particularly commissions, they can only turn profitable seven to eight years into your investment. You should be instantly suspicious if your agent is selling you anything but a term insurance plan.
Payments so long as you stay invested
If it seems like the agent has done too little to receive high commissions, you will be surprised to know that agents get paid so long as you stay invested in mutual funds and insurance schemes. So if you invested in a mutual fund via the SIP route a few years ago, and continue to invest in that scheme, you’ve been paying your agent for doing the initial paper work for you all along. The same goes for insurance schemes. Commissions are really high in the first year, but it’s not as if they don’t get paid in subsequent years.