The increased availability of modern financial instruments over the past two decades made more number of choices available to consumers. Emergence of banks as one stop finance shops further accentuated this trend. Along with advantages came some problems. The most important of them is the widespread misselling of finance products to unsuspecting consumers. Banks and insurance agents try to sell wrong or higher priced products to people who don’t need them. Lack of financial literacy result in many consumers falling prey to such dubious practices. Below are some of the tips to protect yourself from financial misselling:
Understand Your Financial Needs Properly
The first thing you need to keep in mind before investing in any finance product is your investment needs. Investments should be made depending upon your age, purpose of investment, and the time period for which you can invest the money. Many people end up buying financial products which they don’t need. For E.g. Insurance products should be brought depending upon the number of dependents a person has. Unmarried or persons with no dependents generally don’t need any insurance at all. Similarly, younger people can invest heavily in high risk alternatives like mid/small cap funds and even directly in stocks. Similarly, people with short term investment needs should not invest in financial instruments like mutual funds and ULIPs which give returns in the longterm. Short term financial instruments like MIPs and debt funds will cater to the needs of such kind of customers better. Many investors buy financial products just by relying on the advice of financial advisors without knowing their financial needs. Understanding your financial needs can go a long way in protecting yourself from misselling of financial products.
Check Product Details and the Terms and Conditions Before Signing and Don’t Buy Unnecessary Products
Just like with any other purchase, knowing the complete details of any financial product is important before buying it. Understanding the details of a finance product can help in deciding whether it is suitable for your needs or not. For E.g. many health insurance products only cover hospitalization expenses. As clinical treatments like cataract and many minor surgeries are undertaken without the need for any hospitalization these days, a health insurance policy which also covers day-care procedures makes better sense. Many financial products also have lot of conditions and exemptions which should be considered before buying the product. Insurance agents and relationship managers generally try to conceal some terms and conditions of financial products while explaining the features of the product to you. Reading through the features and exemptions of the product and doing a thorough research regarding the product on your own on the Internet can help in understanding the product completely and protect yourself from misselling. Highend financial products like Platinum debit cards and premium savings accounts attract additional charges and are not required for all. Banks promote such products even to people who don’t need them for the extra income they bring in. Before buying such premium products, it is good to think twice as to whether you need them.
Don’t Trust the Relationship Manager/Insurance Advisor Blindly
Don’t trust your relationship manager in the bank/insurance advisors blindly. Relationship managers are just sales managers with a different name. Their main work is to sell more number of financial products to bank’s customers. Relationship managers/ insurance advisors have their sales targets and are paid handsome commissions for achieving their targets. They generally try to persuade customers to buy products which they don’t need. It is always good to take decisions basing on your needs and knowledge rather than relying on the advice of others.
Have an Online Investment Account
Its is not just simple banking that has gone online. Most of the financial products like mutual funds, bonds, and even insurance can now be brought online. Having an online investment account makes it simple to buy these products without the need to visit the bank often and handling all the paper work. Online investment accounts are offered by stock broking houses, mutual fund houses, insurance companies, and banks. Most of the banks have tie-ups with limited number of mutual fund (AMCs) and insurance companies. There is a chance that the best performing mutual fund and insurance policy might not be available with your bank. But fund managers pretend that they are offering the best products available in the market and sell you the second or third best performing products. Having an online investment account makes it possible to always buy the top rated finance products. Unlike banks, these online investment accounts sell products of almost all major service providers in the market. Online investment accounts also make it easy to temporarily transfer your surplus cash lying in your bank accounts to money market mutual funds and earn higher rates of interest for it.
Be Careful with’Investment Plans’
You can very easily remember that you were advised by your relationship manager regarding an ‘investment plan’ which would give great returns in a short period of time. Most of the these so called investment plans are actually insurance plans with a savings element (ULIPs). The premium amounts charged for ULIPs are substantially higher than those for traditional insurance policies as a major portion of it is invested in different kinds of financial instruments. Banks encourage their customers to buy ULIPs as they get high commissions (20% – 30%) than on other financial instruments. ULIPs are not suitable for short term investment and many people end up with negative returns if they close the policy within 4-5 years. Commissions are apparently paid directly from the premiums you pay and hence the actual amount invested is much lower than the premiums collected. Investing in mutual funds or even direct investments in equity can give you equally good returns. Mutual funds are transparent and their performance can also be tracked easily.
Have Some Basic Financial Knowledge
Finally, as the saying goes: Knowledge is Power. Every adult who is managing his own finances need to have some basic financial knowledge. A good understanding of the different kinds of investment options and financial needs makes it easy to select the right product you need as well as protect from financial misselling. Unfortunately, many people don’t even understand the difference between major financial products. A number of online sources like Investopedia have all the information regarding different finance products presented in an easy to understand language. All you need to do allot sometime to read and understand them.
