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Cover Story
Don’t Get Sold A Dummy
Beware the greedy agents and financial advisors who try to sell you duds as investments you don't need
By Sunil Kumar Singh     
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Ajay Anand, in his mid 40s and an operations manager in a Mumbai-based logistics firm, was looking to diversify his mutual fund portfolio. He got in touch with his bank’s relationship manager to suggest him some good ‘high return’ funds than the three ones he already had. The glib relationship manager advised him to exit from the existing funds as their NAV was ‘expensive’ at Rs 112, Rs 80 and Rs 203 each, and instead start fresh SIP investments in three ‘cheap’ NFOs with their NAV of Rs 10 each. Playing a mind game, the relationship manager asked Anand to invest in new funds as they were recommended by the bank’s ‘Research Team’.

Convinced, Ajay redeemed value from his existing funds that he had been investing in for the last 4 years through SIP and deployed money in the NFOs, only to realize a few months later that he made a wrong decision as the value of the schemes he exited had grown by 10% while the value of NFOs had grown by a meager 5%. Also, he had failed to understand that low NAV doesn’t mean the fund is cheap and it has nothing to do with the future performance of the fund.

Now, he has only two options — either to continue with the underperforming funds or redeem. Either way he stands to lose. With six SIPs paid, Ajay is stuck with funds he never needed. The relationship manager, on the other hand, had walked away with fat commissions by selling NFOs.

"All agents are like this", he says before hanging up the phone.

It’s not too uncommon to see mutual fund and insurance agents trying to hard sell. Using crafty tactics such as promising a gift, guaranteed return or even a foreign trip, in order to induce buyers to buy is all too common. Buy it or you are going to lose, so goes their sales pitch. But don't press the buy button yet, or else you may get mis-sold.

Let’s try to first figure out what mis-selling is all about and how investors can avoid falling prey to it. Mis-selling simply means selling something to a customer on the basis of false or misleading advice. Be it ULIP, insurance, mutual fund, property or a plain-vanilla term plan, there is hardly any financial product or asset where mis-selling is not rampant and where buyers are not duped by agents or intermediaries.

Many of you must have seen the notorious vanishing act of unit-linked insurance products (ULIPs) that once used to sell like hot cakes during the boom period of 2006-07. Investors mistook ULIPs more as an investment product, owing to its ‘high-yielding’ market-linked nature, than as an insurance product and bought them in the hope of reaping ‘guaranteed’ high returns in just three years. But that was not to be.

The crash of 2008 dashed high hopes. The boom-and-bust cycle of ULIPs — where thousands of unsuspecting investors lost tons of money after agents promised them high returns without explaining the product features properly and the inherent market risks — is a textbook case of how mis-selling has taken deep roots into the Indian financial system.

A research titled ‘Estimating losses to customers on account of mis-selling life insurance policies in India,’ by Monika Halan, Renuka Sane and Susan Thomas, Indira Gandhi Institute of Development Research, April 2013, reveals a startling figure about mis-selling in India. It finds that between the years 2004-05 to 2011-12, investors lost a whopping Rs.1.5 trillion (Rs 150,000 crore or $28 billion) due to mis-selling of insurance products.

Mis-selling or Mis-buying

It’s not that mis-selling is always resorted to by agents or intermediaries deliberately. Sometimes it’s a case of pure defrauding by an agent, sometimes ignorance of investors as well as agents and sometimes the plain laid-back attitude of investors. Many a time, customers don’t even realize that they have been mis-sold.

As Tapan Singhel, MD & CEO, Bajaj Allianz General Insurance maintains, “The way insurance has been sold, the customers either don’t look at the document or sign without reading it. It may not be only because they do not want to look at the document but more so because of the low priority that insurance has in a typical Indian's mindset. That is where the problems come.”

It so comes out that in many cases mis-selling and mis-buying happen to be the two sides of the same coin. Agreed, agents are an important intermediary to address your investment needs, especially if you are an investor with limited financial knowledge. But then, don’t allow them to play checkers.

“People ask for wrong products for their requirement and also sellers sell without going deep into the actual requirement of client (due to their own ignorance). So when customers don’t get the product as per his actual need that selling gets termed as misselling,” maintains Manikaran Singal, Certified Financial Planner, Good Moneying, Chandigarh.

He adds that as long as the level of financial literacy among investors does not improve mis-selling cannot be curbed entirely. Regulators are doing their best by reducing commissions from the products to curb mis-selling by seller, but they don’t understand that mis buying is more rampant than mis-selling.

Constrained by their limited intelligence and lured by temptations of high returns, investors often put the wrong foot while buying a product. Agents on the other hand, too are under pressure to achieve their sales target and therefore tend to push those products that earn them fat commission.

“Motivation in mis-selling is generating high income or sales target. To a large extent, misselling also happens because of lack of awareness and knowledge of both advisor and consumer,” adds Samar Vijay, Director, InvestCare, Noida.

Mis-selling, he continues, is essentially a mismatch of perception and reality. “I have seen people having specific point of view on all investment products. These people are ideal candidates for mis-selling because their perception can over-rule the reality of the product.” This means, due to experience or loose knowledge acquired from elsewhere, people tend to develop perception. For example, he elaborates, the current general perception that 'equity is worse, or real estate is better' offers an ideal opportunity for a real estate advisor to mis-sell.

Don’t Be a Lizard Brain Investor

Behavioral finance says it’s very common to find herd-like movement among investors while buying investment products when emotions tend to dominate the real needs. Just because a friend of yours or your neighbor told you nice things about a particular insurance plan or a mutual fund, it doesn’t mean you should blindly embrace the advice and buy the fund.

If you have read Terry Burnham’s book ‘Mean Markets and Lizard Brains’, you know how detrimental this herd behavior could be in the world of investment.

In his book, Burnham identifies two effective parts of human brain — the pre-frontal cortex that does analysis, and the rest which he called the ‘lizard brain’ the primitive brain that is programmed to find and act on patterns, guiding our instincts and impulses. For instance, if there is a mutual fund that is giving good returns every year, many investors get optimistic about the fund. The lizard brain figures out the pattern and propels you to buy the mutual fund even if you don’t need it. But you realize the futility of the fund only after you buy it.

For most of investors, believing the words of an agent or of the best friend is just plain instinctive. But that’s the last thing they should do as an investor.

Agent Ain’t an Advisor

A salesperson or an agent’s job is not to advise on the product's suitability for the specific needs of customers. He/she is just an intermediary between the company he is representing and you, as a customer and being so his strategy revolves around just three words: sell, sell, sell. It is unrewarding for him to think about the investor’s financial goals when he has his own to fulfil.

Instead, if you want to draw a complete financial plan roadmap and want to find out which mutual fund or insurance policy you should go for, get advice from a professional financial planner who would cherry-pick bespoke mutual fund and insurance policy according to your needs and goals.

Agents/relationship managers/brokers apply novel tricks to mis-sell products such as asking investors to surrender the existing policy (giving false reasons of non performance) and instead to buy a new high commission-yielding policy; churning the policy every 5 or 6 years so while policyholder pays the price (read commission); selling an investor 5 funds with SIPs of Rs 1,000 each instead of one fund with SIP of Rs 5,000 thus fattening his commission; selling retired or elderly person a long-term or child plan; selling regular premium plan as single premium plan, selling endowment plans without disclosing the expenses and commissions earned, selling ULIPs by promising huge returns, and so on.

Recently it’s also observed that some unscrupulous elements call randomly and introduce themselves as belonging from IRDA or Ministry of Finance and lure customers with fake offers like bonus or incentives. In any case, the objective of the agent is clear to push high commission-yielding products.

As Neeraj Chauhan, CFP, CEO, The Financial Mall, a Delhi based financial advisory firm, says, “Agents/ relationship managers/brokers mis-sell policies by assuming wrong returns or promising extra returns to lure customers. The customers majorly buy such policies either in obligation or being ignorant. Lot of miss-selling happens during last month of a financial year as clients are in a hurry to save taxes.”

Ignorance isn’t a Bliss

When it comes to buying insurance or a mutual fund through an agent, or for that matter any financial instrument, remember that ignorance is no bliss. If you have limited wisdom about an insurance plan or a mutual fund scheme, it becomes easy for commission-seeking agents to trick you into the wrong insurance or mutual fund scheme.

In order to prevent investors from becoming an easy target and falling prey to mis-selling tactics, regulatory authorities have been taking various steps to tackle the menace of mis-selling by laying down strict rules.

Last December, SEBI cracked the whip on mutual fund mis-selling by making it punishable and bringing it under the Prohibition of Fraudulent and Unfair Trade Practices regulations. Further, back in 2009, SEBI had abolished entry loads — the fee deducted from the amount of money one invests in a mutual fund — to reduce mis-selling.

Insurance regulator, IRDA, has also laid down the certain pre-requisites for becoming an insurance agent. First, the applicant should have passed the class 12 examination or equivalent examination conducted by any recognized board/institution. The applicant then has to undergo 50 to 100 hours of training in an IRDA-approved institution. After completing the training, the individual has to write pre-licensing examination conducted by the IRDA and it is only after succeeding in the examination that he is given license by the IRDA to work as an insurance agent.

Similarly, to become a mutual fund agent one needs to get license after passing NISM Mutual Fund (Distributor) examination. Then one needs to get registered with Association of Mutual Funds India (AMFI) that allots him/her AMFI registration number (ARN) and make him/her AMFI Registered Mutual Fund Advisors. Once the individual gets an ARN, he/she has to get enrolled at a mutual fund company to sell its products. However, unlike an insurance agent, a mutual fund agent can sell products of multiple mutual fund companies.

Apart from this, in order to restrain mis-selling of mutual funds SEBI has also made it mandatory for any staff of a bank, relationship manager or sales person of a mutual fund company selling mutual fund to get 'Employee Unique Identification Number' (EUIN). Any staff or agent selling mutual fund would now have to quote the EUIN for all kinds of mutual fund transactions. This measure would help track down the agent who is later found to have mis-sold a product to an investor, even if he has left the organization.

So, next time you meet a mutual fund agent, just ask him to produce not only his ARN but also his EUIN that would not only give information about help you trace him in he has dumped a product only to earn a commission. As a next step, once the agent starts explaining you about funds, don’t get floored by fancy names such as diversified equity fund, dynamic fund, ethical fund, contra fund, global fund, opportunity fund, children fund, and the list goes on. The names may look bizarre, fantastic, and at times weird, but spare a thought to understand the meaning behind such names. Ask the agent is a dynamic fund really ‘dynamic’, what makes a fund ‘ethical’ and what’s a contra fund?

If the agent’s response is unsatisfactory, do your own research. Ideally, a fund’s name should match with its investment objective. But in many cases this is not the case.

Learn to Say No

If something looks too good to be true, it probably is. So goes the cliché. And this applies in case of buying financial products as well. Don’t get tricked into the trap of intermediaries and buy the product just because the agent is eulogizing it.

An insurance or a mutual fund agent would spare no time in demonstrating you through several tools and calculators the benefits of investing in a particular insurance policy where he is getting a fat commission. But don’t fall for it until you have done your own basic research.

“There are broadly two factors why agents mis-sell insurance policies and mutual funds — either they’re under pressure to achieve sales targets or they are not trained enough to give a sound and bespoke financial advice to customers. It’s often observed that in a bid to make more money, many relationship managers or brokers tend to overlook the actual requirements of the investor and instead push products that earn them high commissions,” reasons Gaurav Mashruwala, founder, A Cutting Edge, a financial advisory firm in Mumbai.

Also, if you are not sure of a product or are have limited knowledge about it, don’t invest in it without knowing its ins and outs. If you are planning to invest in a fund, explain your financial goal, risk appetite, period you can continue investing in the fund, so that the mutual fund agent is aware of your needs and objectives and offer you matching funds.

Taker your time to evaluate the recommendations of the agent and if you believe the fund doesn’t fit in your requirements, just say no. This way by spending a little time and research you can save yourself from being mis-sold and buy the right fund that meets your needs.

Similarly, while dealing with an insurance agent beware of tall promises and over-selling tactics. To avoid being mis-sold, the first thing you should do is ask for and check whether the person holds a valid license. Ask lots of questions about the policy to assess if the policy fits your needs. Get details on policy details such as whether it is a single premium or a regular premium policy, premium paying options, among others.

Do not forget to check if the agent has a good knowledge of various insurance policies. To test that you must ask questions related to the policy’s terms and conditions. Also, ask him whether he markets insurance policies of other companies too. If he is a real agent, he would deny that because a licensed insurance agent is allowed to sell life insurance product of only one company. Also ask for brochures and policy wordings of the insurance policy, read them and if you are stuck somewhere ask the agent to explain it. Be sure about the policy you are buying, scope of cover and are there any exclusions.

While buying ULIPs ask specific questions related to miscellaneous charges, fund options, switching of funds, benefits if you discontinue the policy, details regarding surrendering the policy or making a partial withdrawal of funds, among others. Don’t leave any column blank in the proposal form, nor let your agent or anyone else fill it up.

Once you're done with these steps, it's time to make payment. Here too you need to be cautious enough. Be alert if an agent agrees to sell you an insurance policy despite you being KYC non-compliant as IRDA has laid down detailed KYC (Know Your Customer) norms for insurance buying. Further, when you are paying premium through an Intermediary, check whether he/she is authorized to do so by the insurance company and ask for a receipt immediately.

Once you make payment and get your policy document, don’t just sit back. Go through it thoroughly again and see if there are any terms and conditions that you don’t understand. For life insurance and health insurance policies, there is a free-look period within which you can return the policy and get refund of premium paid if you do not agree with the policy’s terms and conditions.

Mis-sold, Now What?

If you buy financial products based on your needs, goals, risk profile and objectives as opposed to just chasing returns, there are lesser chances of you getting mis-sold. However, in case you believe you have been mis-sold, you need to have Plan B in place. The first thing you should do is to get out of the product in a safe manner. The exit strategy varies from product to product.

“Once stuck the investor should do his math to evaluate cost of exiting instrument Vs continuing. If cost of continuing in the product is more and the product is not in sync with the objective, goal, risk profile of the customer then he should exit at the earliest available option,” maintains Chauhan.

In case you’re stuck in a mutual fund, just liquidate your holdings even if you lose out investment, Suggests Mashruwala of A Cutting Edge. In case of insurance, take a call based on factors like term of the policy, type of the policy (whether it’s term plan, endowment, money-back or ULIP); the period it has been with you, and so on. If surrendering the policy is emotionally difficult, you can try going for paid-up option, he adds.

The Way Forward

Notwithstanding various measures to restrain it, mis-selling continues to remain clear and present. Although SEBI has declared mutual fund mis-selling punishable, much needs to be done. As Prakash Praharaj, Founder & Chief Financial Planner, Max Secure Financial Planners, Navi Mumbai maintains, “The law/ regulation in India on misselling is not yet deterrent unlike the western countries i.e the TFC (Treat your customers Fairly) regulations in Europe where there are severe penalties for misselling. It is high time law in India be made deterrent and wrong doers are punished.”

The research by Monika Halan et al also maintains, “In India, all the policy interventions in response to the mis-selling during the ULIP period have focussed on changes in regulation by the IRDA. There are also instances of regulators imposing fines or revoking the license of intermediaries. For example, IRDA revoked the license of a broker when found guilty of mis-selling. Where there has been little action is in providing compensation to those investors who got duped by financial service providers.”

It further adds that for consumers to get a fair hearing in such cases, regulators will have to take stronger pre-consent steps, such as mandating sellers to read out the provisions of the contract in the language in which solicitation was done, and to do some due diligence on the customer.

Vijay of InvestCare argues, “While steps by IRDI and SEBI are deterrent to actions, there is a lot that needs to be done to change behavior of both advisor and consumers. If consumers look for short cuts, advisors may be lured into mis-selling.”

Experts also add that there should be a helpline from SEBI or IRDA for investors to enquire or complain. Further, as Chauhan adds, “There should be an agency with punitive powers to act against unethical sellers. Regulatory bodies should proactively take suo moto cognizance of fraudulent activities with  strict actions against the company and seller." f

 

Interview 1

'Customers Should Exercise The Right To Refuse’

Financial products need to be recommended or sold in line with the customers’ requirement and are not an FMCG product that can be bought off the shelf, says Brijesh Damodaran,  Founder and Managing Partner, Zeus WealthWays, a wealth  management firm

What lies at the roots of misselling in Indian markets?

Root of misselling is common across markets. In India, typically the product push to achieve the targets set and the need to get higher incentive is the root.

Is misselling done deliberately by agents to achieve sales target or agents are not skilled and trained enough to sell right financial product to the right customer?

When targets are to be met, then withholding information is also resorted to achieve the targets. Also, majority of the agents are not skilled and not trained enough to sell the product. Financial products need to be recommended / sold in line with the customers’ requirement and is not an FMCG product, which can be bought off the shelf.

What are the major tricks applied by insurance and mutual fund agents to mis-sell their products to customers?

Emotional needs and sympathy are one of the mechanisms used to sell the product. Don't be surprised if one of the close friends or relatives has got into financial distribution of the products and you, out of helping him, buy a product. Also, if a distributor follows up with you constantly, you buy a product out of sheer frustration. More importantly, many a time, the distributor states the high returns which the product will generate, but what he conveniently fails to inform is the function of markets.

IRDA and SEBI have been taking many steps to restrain misselling. But what other mechanisms should be put in place to curb the menace of misselling?

The regulators set the basic rules which need to be followed by the distributors. More importantly, the customer at the end of the day has the right to refuse to buy the product, and he should exercise the right. I personally advocate financial literacy of the customer.

What precautions or safeguards customers should keep in mind to avoid being mis-sold?

It is imperative that customers need to do a due diligence by asking a few basic questions on the product, the risk and the return. Also, if the customer does not understand the product or finds the return delivery mechanism complex, stay away. Saying 'No' is also important. More importantly, financial products are 'sold' and not 'bought'. The same rigid test which a customer carries out when buying a car, a house or for the matter even clothes, should be used when deciding upon a financial product. You never buy on hearsay or what your best friend said.

 

Interview 2

‘Over-regulation would kill  the industry’

Paresh Shah, Director, PCS Securities, Hyderabad maintains every service provider should mandatorily have a due diligence team to ensure right product is sold to the right customer

What measures you have put in place to prevent mis-selling of mutual funds and other financial products to investors and to ensure your customers get the right investment product?

As a company, we always work on giving need-based advice. We follow a financial planning approach that takes care of the client's risk appetite, returns prospects, goals and horizons that help us to prevent mis-selling. The financial planning approach ensures customers' interest first. Our NISM-qualified staff makes sure we give right investment product to our customers. We have very clear instructions to all the executives to sell a product only if it is required by the client.

What more steps should be taken by the financial service industry (insurance and mutual fund sector in particular) to put a lid on mis-selling?

Every service provider should have a due diligence team to verify and confirm (from the customers) the details of the investment products sold to them. This ensures the product knowledge given to customers is apt and correct. The same can be made mandatory for the service provider to have a due diligence team and the regulatory authorities should also monitor this on a random basis. Insurance and mutual fund companies should also send a letter to their clients mentioning the pros and cons, besides organizing awareness programs to educate investors. These measures help put a lid on mis-selling to a certain extent.

Do you believe the incentives to insurance and mutual fund agents should be regulated to restrain mis-selling?

It has been regulated for the past 5 years and is still on. However, it can help stop mis-selling up to a certain limit. The best way to restrain could be giving proper training to an agent that would make him confident about the product knowledge and help him sell right products. The other side of reality is that over-regulation would kill the entire industry.

What could be the exit strategies for investors who have been mis-sold mutual funds?

Depending upon his/her risk profile they should switch to a different product but before doing that they should clearly understand the merits and demerits of the existing product as well as the risk involved in the new product also. It’s suggested that he should take advice of a professional expert and take an informed decision.

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