In hindsight, retired lecturer Chandrakanta Makhija realises that she should not have trusted the fast-talking insurance salesman. But she was attracted by the chance of doubling her savings in three years—especially since it came with what seemed like a cast-iron guarantee written and signed on stamp paper. Makhija withdrew her savings of Rs 15 lakh from the Senior Citizens Scheme (despite having to pay a penalty for early withdrawal) and gave it to the salesman to invest. He put the money in a unitlinked pension plan, which would have given him a 10% commission in the first year, 7% in the second and 2% every year for providing service for the full term.

 

As for Makhija, after the deduction of 15% policy administration charges in the first year and the stock market correction, the value of her Rs 15 lakh has fallen to less than Rs 11 lakh in six months. Of course the agent did not see fit to inform her of these charges when he got her to sign on the dotted line. She has lost all faith in the broker but a little hope is still alive. “The agent told me that he has been switching between the equity and debt options, so perhaps I have not lost too much,” she says. But it seems the agent is only taking her for a ride. Every time she asks for a statement, he fobs her off with some excuse or another.

Chandrakanta Makhija, 64 years, Delhi Lost a chunk of her retirement corpus in an investment that does not suit her Fraud agent promised on stamp paper to double her money in three years Agent’s response "If you keep calling me, how will I double your money"

1 in 4 financial products being bought in the country is mis-sold

Makhija’s tribulations—she has chronic health problems and looks after her physically challenged brother and his family—caused so much indignation that when her case was discussed with colleagues, several wanted to “name and shame” him on these pages. But Makhija is reluctant to reveal details. So we decided to do the next best thing— ensure that others don’t fall victim to such glib salesmen.

Unfortunately, such is the nature of competition in the financial services arena that sales agents promise prospective customers the moon to meet unrealistic sales targets. They also conveniently forget to inform customers about key charges. Some even make promises they know can never be kept. It’s verging on fraud, but those in the business call it mis-selling. It’s what happens when retired people are advised to buy pension plans or when young, unmarried people are sold endowment policies. Mutual fund investors are coaxed into churning portfolios every three months and first-time investors in equities are encouraged to buy derivatives without being told of the risks.

However, agents and brokers insist that all they do is hardsell. And they have to do it to meet targets and earn commissions. There’s a very thin line dividing mis-selling from hardselling but more and more agents are erasing the line altogether. It is estimated that mis-selling occurs in at least one of every four financial products or services sold.

The tragedy is that there’s little that can be done to prevent mis-selling. That’s largely because unscrupulous or desperate salesmen rarely tell investors a complete lie— they resort to a canny mixture of truth, halftruth and lies. It’s often difficult to define or pin down mis-selling.

Watch out for Six terms that should alert you to mis-selling Mnimum returns Ulips and mutual funds are market-linked products. If the markets go down, so does value of your investment. If the agent or broker gives a guarantee, he’s lying Past performance Just because a fund gave dazzling returns in the past two or three years doesn’t mean it will continue to do so in future as well Cheap fund Don’t believe an agent who projects a fund with a low NAV as cheaper than others. The NAV level does not mean anything Last chance Steer clear of brokers who try to hustle you into a quick decision. Ask for some time (7-10 days) during which you can compare with rival products Actively manage This actually means that the relationship manager will buy and sell indiscriminately or even push you into risky margin trading Sop paying premiums Don’t think that your Ulip gives you free cover. If you stop paying premium, the mortality charges are deducted from the fund value

The degree of loss from mis-selling depends on the investment product. The longer the investing horizon, the bigger the loss. Investments that come with lock-in periods are especially problematic because the investor has no choice but to continue.

This is not something that seems to overly concern banks and other financial institutions. In fact, most of these institutions encourage their sales agents to sell high-commission products, regardless of whether they suit investors or not. “Producers and sellers of financial products often turn a blind eye towards mis-selling in favour of business growth,” says Mumbaibased financial planner Kiran Telang.

Regulatory agencies have been taking action to curb mis-selling. But as the case studies in the following pages prove, it is not adequate. It’s common for insurance advisors to show projected returns of 15-20% in violation of the 6-10% ceiling set by the Insurance Regulatory and Development Authority. “Insurance agents openly ask clients to surrender existing Ulips and invest in new ones. They assure high returns and still get away with it,” says Jaideep Lunial, Chandigarh-based regional head of Wealth Gyan Financial Planners.

Securities and Exchange Board of India has barred entry load on funds bought directly from fund houses. But most funds houses have done little to promote direct selling. Worse, investors are still being charged trailing commissions on schemes bought directly from fund houses, even though no agent is involved in the transaction.

Obviously, better regulatory intervention is essential. But more vital is investor education. Let the buyer beware. If as an investor, you are willing to believe whatever is said, you are setting yourself up for a fall. “To pass the onus to regulators or banks or insurance companies is to take the easy way out. It may not even work in the long run,” says Akhilesh Tilotia of Park Financial Advisors, a Mumbai-based financial planning firm. Understand what you’re investing in and don’t be afraid to ask questions. Someone once said, there’s no such thing as a stupid question. So clarify your doubts. Go online and research. Then when the agent tries to con you, you can be one up on him— and you will not lose your precious savings to him.

—With Rakesh Rai