Date : 12 May 2017
What happens when you go into your bank to deposit a large sum of money or if you have a huge balance in your savings bank account. Probably someone from the bank staff would approach you with an excellent investment option for your cash or your bank balance. This person is your Relationship Manager. You'll be told to divert your money into a product as the money that is lying in your account is generating very low return while their investment product will deliver way better returns.
So, shall you do as he says? Since he's your banker and there exists a relationship of trust between the bank and the customer, and you entrust your hard earned money with the bank, because you trust the bank.
The answer to this is simple, “No”
We often hear about instances wherein individuals were fooled by their Relationship Managers, and were made to invest in a product which were far from suitable for them.
A 60 year old man approached his RM, he wanted to invest a part of his retirement corpus in a product which could give him a better rate of return than his saving account. He wanted to keep this money as his emergency fund, so there should be safety of principal and flexibility of withdrawal.
The RM sold him a long term single premium endowment plan.
Now what will the poor old guy do with this policy. He has to dedicate a huge amount today which will be locked in for a long period of time, probably until he dies. Moreover, it didn't serve the purpose of an Emergency Fund. And the worst part is, he didn't even know that he bought an insurance policy.
In another instance, a 32 year old man who was on the lookout for a good tax saving option, asked his Relationship Manager for advice. The RM suggested him a product which had the following features:
1. The investment is eligible for deduction u/s 80C and 10D
2. He would get a life insurance cover of Rs 15 Lacs
3. He will get a fixed return of 12% p.a.
What else could he ask for? The RM was a Messiah for him.
Was he really?
The reality was, the first two points were true. The third point had a small glitch, and that was Fixed Return, it was actually a return of upto 12%. It could be 4%, 5%, anything below 12%. And another very important point that the RM forgot to mention was, this product had a lock-in of 22 years.
The investor was quite confident about the product, but then he decided to consult his wise uncle before investing. This decision helped him from being screwed up big time. The Uncle could sense there's something fishy because of the over enticing features of the product. So, he researched and revealed the truth to this investor, that this product was not just meant for him.
There is no end to such mis-selling stories. Your bank RM should be the last person to seek investment advice from. The advice can cost you dearly.
But why do the Relationship Managers sell the wrong product to the investors?
So, they mis-sell because of the following three factors:
1. The Relationship Managers get Commissions on the investments that you do through them. And each investment product has a different commission percentage attached to it. And generally, the commission paid on a product and the quality of the product are inversely related. This means an investment product which bears a high risk and offers low return will offer a higher commission, compared to a product which bears a lower risk and offers high returns. So it goes unsaid, that the RM will pitch that product which will bring him the highest Commission.
2. The Relationship Managers get sales Targets. They get overall targets as well as targets to sell specific products. So, in order to achieve their targets, the RM would make you as their target, and will try to sell those products to you, where they are falling behind.
3. The Relationship Manager will offer those products to you which are lying on his shelf. The bank will have a tie – up with limited number of companies, so they have only those products to offer which are offered by those companies. For Eg. You want to buy a Term Plan. Now you ask your bank RM to suggest the best Term Plan for you. Since your bank has a tie up with let's say two Insurance Companies, so your RM will give you options from those two companies only. Whereas, there are so many Term Plans available in the market which are way better than the ones suggested by him. But because he has only two options to offer, so he would advise you to go for either one of them.
So to conclude, your investment is a product of the RM's Commission, his targets and the products available with him.
The only way to avoid falling prey to the trap is be updated, and take a well researched and informed decision. The idea is you should not blindly trust anyone when it is about your hard earned money and not that after reading this article, you look at your Relationship Manager with an eye of suspicion and run away whenever he comes towards you. It is because not everyone mis-sells, he might have something good for you. You should rather research, consult your financial advisor whenever you get investment advisory from someone else.
So, the crux is banks are a good place for taking loans, for depositing money, but not for seeking investment advice.