It is a common thing to hear these days that when you are looking for a suitable investment plan to fit in to your financial plan, not every time can you expect the correct advice from the financial advisors.

While discussing investment with an advisor, many times you might come across incorrect guidance. It is at this time where one gets to how to handle things wisely and stay protected from such advices that might trap you in the end.

When we conducted a small survey, we found advisors (or the so-called relationship managers) misguiding the naive and easily trapped customers, and pushing them to unsuitable & high commission investments. This was clearly a profitable situation for the distributor, and not the investor who is investing his hard-earned money.

Table of contents

• Who is a financial advisor?
• Few situations where the advisors may trick the investors
a) Tax-saving fixed deposits or ULIPs or PPF
b) Equity mutual funds or ELSS funds
c) Monthly income plans
d) Term insurance plans
e) Low-cost ULIPs
f) Tax-free bonds
• How to identify and avoid tricky financial advisors
a) Take time to think about the most appropriate option, as if it is your last
b) Check your financial advisor’s credentials
c) Check if your financial advisor has experience
d) Ask your questions before hiring
e) Check for trustworthiness
f) Avoid the products that do not fit into requirements
g) See if they have a proactive approach
h) Know how your financial planner gets paid
i) Beware in case your advisor prevents you from considering other products
j) Check if the Financial advisors put your interest first
k) Financial advisors should never be in a panic
l) Beware of the exaggerator who promises to beat the market
m) Remember no market-linked product is completely risk-free
n) You only hear from your financial advisor once in a while
o) Take indications from the past

First, let’s see who exactly is a financial advisor.

Who is a Financial advisor?

A financial advisor is a person who gives financial guidance or advice to clients for a remuneration. Financial advisors provide different investment services such as tax planning, estate planning, investment management, personal finance, and other money matters.

Now us consider a few situations where these advisors can/may trick the investors, based on incorrect information given by the former.

a. Tax-saving fixed deposits or ULIPs or PPF

The moment one seeks advice about investing in FDs, the advisors say that the returns from FDs, both principal and interest are taxable. They suggest the customers invest in ULIPs (unit-linked insurance plan), which according to them gives tax-free returns. Many large private banks were inappropriately entrapping customers into this. However, what they showed was not actually the real picture. When researched upon what they suggested, we found that the advisors never explained that the returns from ULIPs are unsure, and rather linked to the market situations.

In the case of FDs too, only the interest on it is taxable, while the principal amount is not. In no case, the advisor has suggested risk-free and tax-free PPF as a better alternative. PPF investments don’t get any commission to agents or advisors. Now I need not explain why they didn’t recommend PPF to investors.

b. Equity Mutual Funds and ELSS Funds

Here too, when asked for investments into diversified equity funds, the advisors tried to sell us a ULIP. They even try to criticize mutual funds, just to make them appear unattractive to customers as compared to ULIPs. They even tell you that mutual funds are expensive compared to ULIPs.

However, the told story is not always the real one. In fact, mutual funds are the cheapest way to invest in stocks.

c. Monthly Income Plans

The wealth managers, who are insistently marketing upon the capital protection oriented plans, never tell you about these being closed-ended and offering limited liquidity to the investors. The fact is the closed-ended capital protection funds are more or less similar to the open-ended Monthly Income Plans of Mutual Funds.

Closed ended funds pay more commission to agents or advisors and open ended funds pay less commission to agents. Now I need not explain why capital protection funds are sold more than the Monthly Income Plans.

d. Term Insurance Plans

Many a time, you will find advisors telling you that term insurance plans (the best form of life cover), are a waste of money. It was actually ridiculous for them to say that the premium goes waste because the same does not have a maturity value. In fact, all investment plans (including the traditional ones and ULIPs) levy charges for mortality.

e. Low-cost ULIPs

In such scenarios, the insurance agents tried pushing the traditional schemes over ULIPs, arguing that the former sell more than the plans that are market-linked. Even being far more customer-friendly, no advisor wants to sell low-cost ULIPs, because of the low commission that they offer.

But are the ULIPs really worth an investment? You will discover the key features of ULIP vs. Mutual Fund and Term Insurance by yourself after watching this video. Watch the video and be aware of the advice given by your financial advisor on ULIP!

f. Tax-free bonds

The advisors might tell you about the necessity of a Demat account for investing in tax-free bonds. However, the truth remains that one can purchase these bonds in physical form as well, and can go for dematerialization at a later stage.

If you find yourself into any of the above scenarios, you need to keep an eye on whether or not your advisor is misleading you to wrong investment advice. In such situations, you must have some warning signals to watch out.

How to identify and avoid tricky financial advisors?

Here are ways to help you find and avoid tricky financial advisors:

a. Take time to think about the most appropriate option, as if it is your last

Take your investment seriously, and do not make a hassled decision, influenced by whatever the advisor tells you. There is a probability of the advisor to give the wrong advice, too. So, take your time to think and research about the product, in order to find out how it fits into your financial strategy. Do not just make a decision in the first couple of meetings.

b. Check your financial advisor’s credentials

Before you hire a financial advisor check his credentials and also if there is any complaint history. Check the background and the reputation of the financial advisor. Check if they have a track record of success.

c. Check if your financial advisor has experience

He should have some experience in the financial services industry or some industry-recognized certification. One of the highly regarded designations is that of a Certified Financial Planner (CFP). There are also other credentials such as Personal Financial Specialist (PFS) or a Chartered Financial Analyst (CFA). These professionals must meet the standards for ethics and experience. Credentials are got by passing an exam that means they have proficiency in the subject matter. To maintain this designation he must adhere to ethics and continue education requirements.

d. Ask your questions before hiring

A few questions like:
How long have you been practicing?
How are you compensated?
What are your qualifications?
How many clients do you work with?
How you track success for your clients?
How you communicate with clients?
These questions will let you know how well they communicate and where they stand.

e. Check for trustworthiness

You first need to have trust in the recommendations of an advisor. If you have no trust, confidence, and feel nervous, fearful, or stressed after a discussion with a financial advisor, it is not a good sign. Trust your instincts and stay away.

The first step to gain trust is to check the client testimonials and google review of your financial planner. You can also ask the financial planner to set up a call with one of his/her existing clients. This will give much more clarity.

f. Avoid the products that do not fit into requirements

A financial advisor must first understand his/her customer’s needs, to be able to offer the best investment product. If your advisor does not inquire about your basic things, how will he be able to benchmark your needs? One should try avoiding financial advisors offering such insurance policies.

g. See if they have a proactive approach

Good financial advisors have open communication. They update you on current financial issues and financial opportunities. They help you understand complex financial concepts. If the financial planner withholds information or doesn’t take time to explain his recommendations to you, then he is not worth your time and money.

h. Know how your financial planner gets paid

You can ask them if they get a commission for recommending a product over the other and also check if the products you are buying meets your needs.

i. Beware in case your advisor prevents you from considering other products

If in case, your advisor offers something other than what you have asked for, it is time you open up your eyes. One thumb rule to remember is that ‘never invest in options you do not understand’. Do not believe anyone unless you are completely sure of the features and working of the product that you are looking forward to investment.

j. Check if the Financial advisors put your interest first

Financial advisors shouldn’t pressure you to get products to meet their quota or for commission. Check if they offer a wide range of products and services.

k. Financial advisors should never be in a panic

A financial advisor should never panic. He has to check what is best for you. If he is not like that and if he is always looking for the latest stocks with urgency, then he may not be doing it for your interest. There should be no urgency when it comes to long term investing.

l. Beware of the exaggerator who promises to beat the market

Beware if your financial advisor promises to beat the market, no one can actually guarantee that to you. So beware.

m. Remember no market-linked product is completely risk-free

The time you come across any advisor offering you any market-linked product and that too, risk-free, be sure of the advisor making a fool around you.

n. You only hear from your financial advisor once in a while

They should make an effort to communicate regularly. They should make sure you are on track to meet your long term goals. If not, they are not worth your time.

o. Take indications from the past

Your past performance as an investor is always a good indicator of future performance. However, there is never a guarantee of the same, subject to market risks. Therefore, look out for various things, before you actually make a decision to invest.

In the investment world, you are safe as long as you don’t make major mistakes. One such major mistake is falling prey for misleading advice. If you could identify and stay away from tricky financial advisors, your money is definitely safe. One such way to be alert is to create a unique workable financial plan to achieve all your life’s financial goals. If you want to create a workable financial plan, then I firmly vouch for you to take advantage of