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23702The Cost of Bad Financial Advice

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  • P Nair
    Oct 3, 2013
      The Cost of Bad Financial Advice

      Bad Financial Advice cause financial loss to investors

      Do you think both insurance/mutual fund agents and investment advisors have the same responsibility to act in your best interests? Would you be surprised to find out that there are two different principles that apply to the delivery of financial advice?.  The first principle is called “Suitability” and other principle is of a fiduciary nature.   These are just two principles only but the second one has presently got no relevance in India.  None of the brokers and agents has any fiduciary responsibility right now.    A fiduciary has the responsibility to make recommendations in your best interest in all aspects of the financial relationship.  Recently Securities Exchange Board of India (SEBI) enacted Investment Advisory Regulation for regulating Investment Advisors and Financial Planners.  Now only qualified persons are  allowed to act as Financial Planners with  SEBI registration.  SEBI has also enshrined in the advisor regulations that investors have to be profiled for risk including age, investment details, income details, risk tolerance, liability and others. Will risk profiling ensure that the lead will not be passed on to those agents who would share their commissions with the advisor friends?. 
      What is happening in reality is that distributors sell for commissions but they also advice because customers ask for advice and without some advice and handholding, no selling can happen, especially financial products. Now one cannot both sell for commission and also advise the investor.
       
      Presently, it is assumed that, insurance/mutual fund agents and share brokers are following the suitability principles while recommending financial products to their clients.  This means their recommendations must be suitable for you based on your age, risk tolerance and financial and other personal situation
      If they have their choice of several products which are all suitable for your situation, they may recommend the one which pays them the most in fees and commissions. Keep in mind, this may not be the product that isbest for your situation, but as long as it is suitable, that’s ok. They do not have an obligation to educate you about other choices you may have, it is your duty to disagree if you have any objection.
      The advisor you have selected is working for a large brokerage house, Mutual Fund/Insurance distributing Banks/Institutions. He did not take the time to educate the client about risk and return and the benefits of a diversified portfolio. Instead, he put them into a product that met their expressed need. A few years later when they were not happy, he put them in to a different product. A few years later, once again, a new product. All of these products may or may not met the suitability principle.  Some unscrupulous advisers normally make money out of your investment by way of churning your portfolio several times in a year.   Each time they advise you to liquidate and re-invest, they earn good amount of commission at your expenses.  Some of these advisers are not bothered your financial wellbeing.  If they feel that, you are not bothered or you are not knowledgeable enough to understand the nitty-gritty of investments theory or the details of the financial products they recommended. As a result your adviser will earn more than what you are earning.
      An investment advisor with a fiduciary obligation to the client would likely have taken the time to educate the client and direct them toward a more diversified approach, even though that was not initially what the client thought they needed
      When searching for advice, a good rule of thumb to follow is simply to ask your advisor how they get paid. That will tell you where theirloyalty lies.
      It is certainly worth a bit of extra time to research and interview several potential advisors. After all, it’s your money and if you are like most people, you can’t afford the cost of bad advice.   A bad or biased advice may eat away your entire hard-earned money.  So be careful about unscrupulous agents, advisers or financial planners.
      Best Regards
      Prakash Nair
      Certified Personal Financial Advisor (CPFA)
      Certified Wealth Manager(CWM)
      https://www.facebook.com/Yourownadviser