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HindustanTimes Sat,27 Dec 2014

Be an intelligent investor

Lisa Pallavi Barbora   November 23, 2012
First Published: 21:48 IST(23/11/2012) | Last Updated: 21:51 IST(23/11/2012)

The concern over mis-selling of financial products to retail investors is rising and for good reason. Recently, HSBC Bank Ltd came under fire in India and globally for some practices that go against customer's best interests.

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Taking official note of such activities, commonly termed as "mis-selling", the capital market regulator, the Securities and Exchange Board of India, issued draft guidelines in August, which clearly define the role and responsibility of investment advisers and also differentiates between an adviser and a pure distributor.

More recently, the Financial Sector Legislative Reforms Commission released an approach paper dealing with such issues.

This paper highlights the need for consumer protection and suggests a single financial regulator which will embrace securities market, insurance, pension and commodities.

While regulatory aspects will be tightened eventually, as a customer, do your bit. So don't blindly accept whatever comes your way as financial advice; question it, do a quality check and only then sign up.

Here are four questions you should ask your adviser and what you should do to sort yourself out.

Does your agent know you have a surplus?
If the bank where you hold your salary account is also managing your investments, there is a distinct possibility that your 'adviser' or relationship manager knows your bank balance.

In the case of actress Suchitra Krishnamoorthy, who has filed a legal notice against HSBC India, bank officials contacted her after she deposited Rs.1.4 crore in her account.

If the only reason for an adviser to get in touch with you is a lump sum deposit or a hefty bonus in your savings account, it's the first hint of wrong intentions.

The job of an investment adviser is not simply to allocate surplus money in different products, but to understand your financial objective and recommend products accordingly - irrespective of whether you have a sudden surplus.

How does your agent earn his income?
If the adviser is employed by a bank or other wealth advisory firm, he earns a fixed salary and some incentives.

Typically, incentives are directly linked to the revenue generated from a client's investment corpus. Given this, it's possible that your relationship manager is motivated to earn as much revenue as possible for the bank/company and that may not have a link to how your investments are performing.

As an extreme example, a high commission product such as insurance may attract your adviser even if it doesn't suit you.

So, if your adviser earns a bonus linked to the performance of your portfolio, it may work better for you.

For an independent adviser, the key to your benefit is if the adviser charges a performance or a fixed fee linked to achieving your financial objectives.

Says Ashwin Parikh, partner and national head (financial services), Ernst and Young, "When we move away from commission to fees, the contractual agreement changes between the client and adviser. In case of commissions, it is clear the agent is interested in his own income. Our market is in a stage of transition and this change will take time."

Is your asset allocation in place?
Make sure an adviser considers asset allocation versus individual products.

Financial planning entails an overall analysis of your objectives and drawing up an asset allocation, where your savings are split in a pre-determined ratio across assets such as equity, debt and gold.

This is important because it considers how much risk you can take and determines the returns you can expect.

For example, if you are a low-risk investor, check your equity allocation-having too many unit-linked insurance policies (ULIPs) tied into equity market will not help.

Says Surya Bhatia, a Delhi-based financial planner, "Doing an asset allocation helps know the risk-return framework and is a way to rebalance automatically in line with market movement." For example, if you have invested 50% in equities and that has reached 60% because of a market rally, knowing your asset allocation will help in rebalancing the exposure back to 50%.

How often are products bought and sold?
Once an asset allocation is put in place, the need for change seldom arises. Long-term assets need to be looked at or rebalanced once or twice a year.

If your adviser showcases a new product almost every month and tries to fit it in your portfolio by replacing another, be wary.

A good adviser will try to pace out your investments and encourage regular investments, keeping in mind your overall asset allocation.

So, if new products do come about, there will be space in your portfolio for those rather than disturbing the balance. Says Bhatia, "We will include a new product only if there is a compelling reason to change the existing allocation. But this doesn't happen often."

Work on yourself
Don't let greed dictate investments: Recently, a couple who ran a multi-level marketing scam called Stock Guru got arrested for duping nearly 200,000 people for around Rs.1,100 crore.

Those defrauded have a website called Stockguruvictims.com, which claims investors hoped for interest of 20% per month as promised by Stock Guru's promoter.

A 20% per month return compounded for 12 months will increase your money nearly nine times.

When presented with a proposition that sounds too good to be true, think of how returns will accrue. For returns, there must be an underlying investment and that can be in securities such as stocks, fixed deposits and bonds or physical assets like realty and gold.

Stocks and bonds are backed by actual businesses that are productive and that's how a bond can give a fixed return. But if no investment proposition is attached, something's amiss.

Be upfront: Your adviser can help you only if they know your needs. For that, you have to talk openly about financial matters.

This means you have to discuss long-term goals and reveal how much money you have, how much you earn and spend, and your debt. Else, you can't expect the adviser to give the right product, solution or asset allocation.


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