When you take an oath in court, you swear to tell the “whole truth” and nothing but the truth. Not quite the same when you are selling investment schemes to make a living—you may state the truth, but not the whole truth.
You are given the promotional materials with details of various schemes, trained on scheme details and advantages versus other schemes, et al. You are also given incentives/bonuses on meeting targets, which can include more brownie points for certain products being promoted. Your aim is to be among the top performers. How you get there is a person-to-person approach, though there is more often than not a strong underlying push by the organisation on the priority products.
As an advisor or salesman of investment products, what product you push to a customer depends on whether you can correctly assess the risk appetite, and if you are honest enough to offer the appropriate product. It is here, that the ethical character of the individual comes in to play, because there are honest advisors and peddlers of dream returns both guised as salesmen.
Therefore, laying the blame for mis-selling investments entirely at the door of wealth management companies may not be completely correct.
However, what is more important to appreciate is that the foot soldiers (read salesmen) don’t have enough knowledge to decide which product is to be sold, and which not. They also don’t understand well enough how safe or unsafe a product is—they go almost entirely by what’s told to them by the senior management in the organisation, who take these calls.
Who Is To Blame?
Therefore, if a bad apple has been sold, it is the senior management that should take the blame — not the foot soldier. But, if the product is considered reasonably safe from a somewhat high risk-appetite investor’s perspective, and it has been mis-sold to a low-risk appetite investor, the salesman would be the one at fault.
Let’s be clear though, in any transaction, there are two parties and no one party can completely absolve itself of any fault when things go wrong. Take the recent case of Karvy entities and key executives being booked for cheating their investors . Among the key investors accusing the investment advisory group of mis-selling is a couple that invested almost Rs 2 crore.
Now, who goes around throwing that kind of money away without any thought, unless you’ve got piles of dough to do that? Were they given false assurances?
Without getting into whether there is a case for fraud or not in this instance, what the instance suggests is that the greed for high returns seems to have got the better of the couple. And the question to ask is whether they did enough due diligence before investing their money?
When it comes to investments, we often forget the basic simple principle: higher returns come with higher risk. Unfortunately, most people tend to focus more on the expected returns on investment and not on the return of investment.
People are emotional, and they usually let greed get the better of them. The question to ask is: why will someone pay me 20 percent when the bank is only giving me 7 or 8 percent? And if the bank is not lending to this person, should I be?
The logic can be applied simply in the above instance because there is such a wide spread between the two rates. In the market, though, there are smaller spreads even within a safe-risk band.
For instance, you might get a higher return on an HDFC fixed deposit than on a State Bank of India fixed deposit, or on an L&T Finance non-convertible debenture than on an HDFC fixed deposit.
When you are playing within smaller spreads above almost 100 percent safety, it is a judgement call to eke out a little higher returns (note: product features differ, and the above instance is only illustrative), without any large compromise on safety of getting your money back. But what’s most important to note is that what appears safe today, may not seem safe tomorrow—the stress in the NBFC sector has highlighted this amply.
When you invest for a higher return, you are taking on higher risk on the eventual return of your principal. That’s one mantra you must remember. And to not let greed get the better of you, put your options down in writing and take a good hard look at them before you decide where to put your money.
Remember, you are as much to blame for your actions as others might be. Once you own up to that, you’ll take the right call.
