There are trained salespersons, agents and distributors of financial products working tirelessly to sell you the products which you would never buy if you understand the entire detail. The agency commission structure for some of the financial products is so attractive, that an army of distributors is out to sell these products to anyone who comes their way, no matter these plans make any sense for the buyer or not. Taking advantage of the lack of financial awareness of the investor, the agents are successful in misleading and mis-selling the products, specifically to the young employees, those getting into the job market every year. No wonder most of such investors are holding only risky investment products and poor insurance policies that would not do any good in meeting their financial goals. In the pretext of tax saving, unsuspecting buyers are made to buy investment products that commit the investors to pay premiums for decades. They later realise that such tax saving products purchased by them may not be required in another, say a couple of years due to their changed tax and investment scenarios. I had been tricked on multiple occasions by various marketers and aggressive sales persons and drawn into buying totally wrong financial assets, considering them to be great investments. I bought about half a dozen of life insurance policies including pension schemes that would not fetch my dependent, means to meet expenses even for six months in the unfortunate event of my demise. And the pension plan that I bought would not be sufficient to get me two cups of decent coffee per day from the monthly pension that I would receive decades later. Usually, it takes a long time to realise those mistakes if at all, since people are busy in their day to day matters of life. Even after realisation, people fail to share those experiences with friends and family. This results in those same mistakes being repeated by someone younger in the same family, and the process continues.
At one point I realised, in our organisation, everyone owned the same type of insurance plans those give the maximum commission to the distributor, and were the least beneficial for the buyers. And the word insurance was a synonym for investment. You call it herd mentality or the bandwagon effect, the fact is, just because everyone has bought something and thought it to be the best way to save tax, doesn’t make it a better product. In those years, I remember how badly I was looking for an honest and credible financial adviser who can think in my interest and recommend me the investments that suit my goals and objectives. I was ready to pay the professional fee to such advisers. I am not saying such consultants didn’t exist then, but I couldn’t find one. Whoever came to me acting as an adviser actually was a distributor of one product or the other and all of them wanted to sell me those products which will earn them a good commission.
To understand a typical sales process let us assume there is a customer who is seeking some tax saving investment options. The customer comes in contact with the agent, and the agent initiates the sales process by recommending the customer a particular product. The agent takes out a bunch of white sheets of papers and pen, sits down with the potential customer and orally starts explaining the product design and features while scribbling on the sheets of paper, doing the calculations while the customer looks on. Mostly the calculations are limited to the premiums one pays and the returns what the investors are expected to get in such a way that the investor rarely understands the big picture of the product. Since the yield of such products is not assured, agents do not tell clear information on this. Even if the agent quotes historical returns in terms of percentage, many customers do not understand what does the quoted rate of return mean in terms of capital growth. The investor gets a false picture of the performance of the product. Investors do not know the right questions to ask, such as costs, locking period, surrender value, bonus percentage, minimum assured returns, the real rate of return, an impact of an early exit from the investment, etc., this results in the agent conveniently skipping the complex features of the product. The majority of customers make the buying decision while the agent is explaining the product to them on the white and unsigned sheets of paper. And when the client makes the buying decision, signing the agreement or contract just becomes a formality. The agent takes out the multi-page contract forms and marks all the positions with a little cross (‘x’) on the forms where customers are supposed to put their signature. Customers just look for the ‘x’ marks made on the forms by the agent, and sign the form at the marked positions and hands it over with the first cheque. The sales process ends there.
Regulators are happy that they have enforced the product providers to disclose all material information in the brochure and agreements. We have just seen what kind of effect such disclosures have on the buying decision. An agent motivated by the high incentive for selling a particular product gets successful in doing that without potential customer understanding the information contained in the disclosures. Even after disclosures are made mandatory on product brochures, it is unlikely that they get conveyed to the consumer in the correct manner. The regulators have taken the view that since the customer has signed the documents, the buyer is responsible for the purchase.
It is very important for everyone who has a regular income, to have the basic awareness so that they are not tricked and trapped by financial product distributors. The book How to Avoid Investment Traps: A Guide to Independent Investing deals with both the important aspects of investment, that is how to protect yourself from someone selling you a product that is not suitable for you, and also to impress upon the importance of investing and how to do it yourself independently by learning simple, logical and easy-to-learn concepts and tools. Please share your thoughts.
Khalid A Khan
