- Date : 03/09/2019
- Read: 5 mins
Financial mis-selling is rampant. If you have fallen victim to it, don’t panic and try to exit as soon as possible.
Relationship managers at banks and NBFCs work under tremendous pressure to meet their sales targets. This can potentially create a conflict of interest, where they push a product that is not best suited to the clients’ needs. Many a time people end up buying these products only to realise their fault later on.
For example, imagine a 55-year-old retiree approaching a bank to open a fixed deposit of Rs 10 lakh with a monthly payout. The relationship manager may suggest investing in a balanced fund instead, promising a higher income through dividend payout. This is mis-selling for two reasons:
- The dividends are not guaranteed to come and can stop at any time, and
- The equity exposure carries a risk that is not worth taking on for most retired individuals
Mis-selling is when a financial adviser gives unsuitable advice to a client, does not explain the risks involved or does not provide enough information to the client to make an informed choice. It is not about whether one losses money or not, but that the product was unsuitable for the client’s requirements.
Here is what you can do if you are mis-sold a financial product.
Insurance policy is arguably the most mis-sold financial product. For example, you want to get a home loan from a bank, and the relationship manager wants you to buy term insurance to cover the payment of the loan. You may already have an insurance policy that can cover the repayment, or the manager may not share all the exclusions with you misguiding you into thinking that it was a superior product. Luckily, in such cases, you can return the policy without any costs within the lock-up period. IRDAI, the insurance regulator in India, insists that all insurance products have a minimum 15-day free-look period. Many insurers offer up to 30 days of free-look period as well. So, if you are mis-sold an insurance policy, just cancel it within this period. Remember that the period starts from the day your coverage begins and not from the date of application.
As selling balance funds earn the relationship manager higher commission, it is likely that they would push it on unsuspecting customers. If your portfolio already has a lot of equity exposure, the additional exposure through a balance fund may increase the risk you wish to take on. If this is the case, you should immediately redeem your funds. Most balanced funds charge a 1% exit load if redeemed before one year period has lapsed. While this is a significant cost, it may be worth paying it to keep your risk profile in check. Of course, you could try to rebalance your portfolio by reducing equity exposure from your other investment as well. But this could be far more cumbersome and upset long-term plans you may already have in place.
Related: How to be on the right side of debt
It is quite common for banks/NBFCs, to push fixed deposits to senior citizens who may be looking to invest in Senior Citizen Savings Scheme. You may be mis-sold FD in other ways as well. For example, if you approach a bank for opening a bank locker with them, they may insist that you should open an FD with them to get one of the limited numbers of lockers allocated to you. In any case, if you are mis-sold an FD you can make a premature withdrawal immediately. While you will earn lesser than promised interest, you will hardly lose any money in the process. This may be difficult in case you have bought an FD with an NBFC as most of them do not permit a premature withdrawal. In such a case, you have no option but to wait for the maturity period to elapse.
Related: FAQs about fixed deposits
If you are mis-sold gold bars/coins, you may not be able to sell them off immediately. This is because you will have to sell them at 5%-10% discount to the market price. It may be better to hold on to the investment made and sell after the price appreciates enough to not make a loss for you.
Mis-selling of financial products happens a lot. Therefore, before investing in any product suggested by a relationship manager – do your own research. Make sure that you read through the terms and conditions of the product. If you do not understand any term, ask your manager to explain the same to you. You should also research it online to get a clearer understanding. Never invest in a product that you don’t understand. Remember that even masters like Warren Buffett and Charlie Munger let go of an opportunity to invest in Google and Amazon because they did not understand how these companies work – and, that was a smart decision. It was smart because this process of investing only in what they understand brought them where they are today. Also, read these 5 things that you can do if your financial information is stolen.