There are two basic aspects of financial advice—product and strategy. Financial advice should necessarily be 95% strategy and 5% product choice. The reason for this is simple. The strategy dictates what you should do with your money. The problem starts when as an investor you consider financial advice to be 95% product choice and 5% or even 0% strategy. The problem is that neither the investor (you) nor the facilitator (your broker) really know what financial strategy is.
You want the best product and the broker wants to sell you the product which is part of his target for the month. He convinces you that the product he is selling is best for you. Thus, the first level of mis-selling takes shape. After this all other aspects of mis-selling, such as non-disclosure of material information, inadequate explanation, false promises, misguided facts etc. follow.
Most agents and bank executives would disagree and will claim that they offer only needs-based advice to their clients. As an investor you have little choice but to find out whether the financial consultant is offering useful advice or just selling you suboptimal investment products. The good news is that this is quite easy.
Here’s how you can do it. The first step is to find the right financial advisor. Be on your guard against product and commission driven agents. You have to shop a little here. Start by asking the advisor what is the best investment today. If he immediately jumps to any product talk and sales pitch just press the eject button. Such a person cannot really guide you well.
The advisor should first ascertain your current financial situation, your future needs and only then suggest a strategy. He should discuss with you the risks involved and then recommend a product. There are many financial products in the market today. However, while one product may be very good for an individual, it may not be suitable for another. That’s because every individual has a different financial situation.
It is the job of the financial advisor to zero in on investment products that are suitable for his customer. He must also explain to the customer why that particular investment is best for him. Unfortunately, there is an abject lack of financial knowledge among agents. Whether you talk to an insurance agent or a bank’s relationship manager, all they want to do is sell you the product. But this does not seem to bother the service providers. Insurance companies simply want more business at any cost and are not interested in educating their agents and brokers on how to provide objective financial advice. Thus, a broker is taught only to sell an insurance policy by harping on its benefits and covering up its warts. Why blame him? Like anybody else, he is only trying to maximise his income.
It’s only that in the process, he destroys the wealth of people who had reposed trust in his financial acumen.
By Kartik Jhaveri, Certified Financial Planner and Director, Transcend Consulting. The author can be reached at kartik.jhaveri@transcend-india.com
