More harm than help

More harm than help

We check how financial advice is actually dispensed.

When this magazine launched its Portfolio Doctor section which formulates financial strategies for selected readers, the overwhelming reponse exceeded our expectations. Do we get hundreds of requests only because the service is free? No, say most of the people who have filled the request form. They claim there is a huge gap between what other advisers promise and what they deliver. There is a distinct conflict of interest between the adviser and the client. Investors are willing to pay for advice but only if they are sure about it.

The financial condition
Investor profile: 24-year-old single female
Annual income: Rs 6.5 lakh
Monthly cash flow
Take-home: Rs 46,000
Allowances: Rs 4,000
Expense: Rs 24,000
SIP: Rs 2,000 (Reliance Taxsaver)
Personal loan EMI: Rs 3,300 (at a rate of 13%)
Existing investments
Mutual funds: DSP TIGER: Rs 34,000,
HDFC Equity: Rs 30,000, Reliance Growth: Rs 50,000
Stocks: Kotak Bank: Rs 10,000, SBI: Rs 4,000,
Axis Bank: Rs 7,000, HDFC Bank: Rs 8,000
ULIP: Rs 30,000
FD: Rs 2 lakh
• Buying a house by the age of 40: The present cost is Rs 50 lakh
• Retirement by the age of 60: Corpus of Rs 1 crore

We cross-checked with some financial planners and brokers who professed that these fears are untrue. The experts insist they maintain complete transparency of charges and offer a one-stop solution to their clients’ financial needs. Maybe they are speaking the truth. But the mismatch is a clear indication that something is fishy out there.

This is why we decided to check how financial advice is actually dispensed. On our radar were three of the most popular categories of advisers: banks, brokerages and financial planners. Kamya Jaiswal went incognito to hunt for advice. What she discovered swings the verdict in favour of the beleaguered investors. Read on to know how to separate genuine advice from tripe.

My Experiments With Truth
Annual returns of 23% on a Ulip? When I just saw on TV that the Sensex tanked by 401 points? But hey, this guy is a relationship manager in a large bank and knows what he’s talking about. Or so I imagined until my trusty calculator showed that at the rate he was quoting, Rs 3 lakh invested in three years would give me Rs 2.35 crore in 20 years. I’ll take two of those, thanks. And start a global financial company of my own.

Out of the bank in just 20 minutes, I walked down a few doors to the office of a famous brokerage where I was taken in hand by a Senior Relationship Manager. Obviously, I was moving up the ladder. This one asked more questions than the chap at the bank, and offered more. “DLF is trading at Rs 300-something. Its peak was above Rs 1,000 after just three years of being listed. Imagine the heights it will now reach,” he said as I practiced my wide-eyed look again.

Of course, he didn’t rush through the “past performance does not guarantee future success” line that ads are forced to carry. Before I could take advantage of the fabulous offer, I had to open a demat account—a tedious process involving 100+ signatures. Would I pay to receive a formal plan? (Do I look stupid?) But I wanted the plan, and after much ado, I got it—a diagnosis without a prescription. I know my investible surplus, thank you very much. Can someone please tell me what to do with it? Invest in a traditional pension plan, came the reply.

That should do as your retirement nest egg, he added. I checked online about LIC’s pension plans. The assured returns come to about 1.57% a year. Assuming the same rate of return, if I invest Rs 1 lakh for 36 years, I will end up with Rs 47.9 lakh as the nest egg.

I spend Rs 24,000 a month now. At a conservative estimate of 6% annual inflation, I will be spending Rs 22.8 lakh a year. The SRM obviously knows something I don’t, because his plan will give me enough to live on only till I’m 62. After which, I better die.

Too tired to walk in to another office, I called up a CFP. To be fair, he asked the right questions and took nearly a week to e-mail the financial plan. But it was just so wrong—an equity mutual fund to be used as a short-term investment, to pay the annual premium of Ulips? This goes against the most basic tenet of financial planning. Worse, his monologue on this lasted for over half an hour. (Not complaining; I caught the rerun of Desperate Housewives during that time.)

My conclusion: the claim that there’s no conflict of interest between the client and the adviser is just bogus. Before I started on this grand experiment, colleagues predicted that I would be sold Ulips. Sure enough, I was. Clearly, the commissions there are good. And I’m still paying the price for starting this quest: the three “advisers” call me at least twice a day to ask when I’ll put my money into their eager hands. If you’re reading this, here’s my answer: Never.