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misbuying and misselling

How to transform mis-buying/selling into a smart buying?

Are you completely satisfied with the financial products you have bought or investments sold to you? If your answer is No, is it because of mis-selling or mis-buying?

Table of Contents

What is Mis-selling and Mis-buying?

Mis-selling means that you were given unsuitable advice, the risks were not explained to you or you were not given the information you needed, and ended up with a product that is not right for you while mis-buying means buyers’ sheer ignorance towards the details and intricacy of the financial product.

Misselling of policies are always on the rise, to read more click on this link: Misselling complaints filed by policyholders.

Now let’s see a few examples of Misselling

  • Selling life insurance to a person who has no dependents.
  • Selling child plan or long-term plan to an elderly or retired person.
  • Selling a policy telling it is only a single premium policy but it turns out to be a regular premium.
  • Selling endowment plans without telling about the charges and the commissions earned.
  • Selling ULIPs telling there are high returns.
  • Telling there is only limited time available for the policy.
  • Telling there is a lot of tax benefits.
  • Asking investors to surrender an existing policy (giving false reasons for non-performance) and asking them to buy a new high commission-yielding policy.

There is this one example where one retiree and his wife went to a financial planner to review their investment portfolio. To the planner’s dismay, he found out that apart from 32 mutual funds-most of them NFOs launched in the past 3-4 years and a long list of equity shares, they had endowment policies, Ulips, and a pension plan. It is improbable the retired petroleum engineer and his homemaker wife understood the various charges and loads for these products before they bought them.

So who is to blame in this case? Five relationship managers of 3 banks who sold all these things or the couple?

Unfortunately, all the financial products in India are not bought but sold. In addition, there are these 3 reasons behind that:

1. Some people buy to please a friend, neighbor, or relative even though neither the client nor the salesperson understands the product.

2. Another reason is ego . The Customer’s ego does not allow him to admit that he does not understand the product. He convinces himself that if a big organization is selling and the product has been approved by Sebi or IRDA and it must be good.

3. Moreover, 3rd reason is that most big purchases are made without professional input, as customers do not know whom to ask.

Never fall into:

    1. Misselling
    2. Misbuying
    3. And the above two categories

Now let’s see the tricks used by agents for misselling

Tricks used by agents for misselling

ULIPs have guaranteed returns

But this is not true. No ULIP comes with guaranteed returns. Agents tell this to attract investors. Anything beyond bank FDs have risks. For that matter even bank FDs have risk.

10% of cashback on premiums paid

Endowment plans and ULIPs have a high commission in the first year. So agents lure
customers by giving part of their commission. This way they get a lot of clients. Many also offer to pay your premiums for the 1st year but do not fall into this trap.

Last chance

If you miss this last date you will not be able to get this product. This is a very commonly used trick to missell.

Selling you products stirring your Emotions

Don’t make an emotional decision while buying insurance or any other financial product. It could be a child education plan, insurance, retirement planning, etc.

You can stop paying the premium after the first 3 years

This statement is catchy as no investor wants to be trapped in an investment product. As you only have to pay for 3 years and the (ULIP) insurance will still be covered makes everyone fall for it. Asking to pay premiums just for 3 years is wrong as ULIPs are long term products.

The performance of XYZ fund has been so great

The single fact that the agents tell about their ULIPs and Mutual Funds is the performance of their funds has been great. What has to be checked is that, if that fund has outperformed its benchmark or its peers.

For eg: If NIFTY has 50% returns and a mutual fund with NIFTY as its benchmark has 50% returns. It’s not great. You are also required to ask the agent about its performance during the bad times and not just the good times.

Guaranteed Return Plan

Nowadays products give some portion of their returns as guaranteed returns. portray as if all the returns are guaranteed returns. But when you ask them for the IRR, they don’t know it.

They just trick the customers into the products with the word “Guaranteed”. They use these kinds of words while promoting the product.

Now let’s see all about preventing misselling.

What is IRDA doing to prevent Misselling?

IRDA has taken many steps to increase transparency. They have made strict laws against misselling and they also take action against fraud cases.

How can you stop yourself from being a victim of Misselling?

Never buy a product aggressively sold by agents: It is very obvious he does that for commission. So better not be carried away by what he tells. You have to know what you need and buy products based on that. Even if your agent is a family friend, you should ask questions.

Don’t buy a product if you don’t understand it: New products keep arriving at the market. The main reason for misselling is the lack of understanding of financial products by investors. Lack of transparency also makes it easy to missell. If you are financially illiterate, you can acquire the skills to understand the product or approach a financial advisor.

If you chose to understand the product, keep a checklist ready: you need to know the risk and return aspects of the product. For any product, you can check the following details:

  • Are there fixed returns or subject to market risk?
  • If the return is promised, then ask for it in writing.
  • Is there a lock-in period and what are the exit options?
  • Is the product approved by a regulator?
  • What are the charges?
  • If there is any fancy return, ask for its working.
  • Don’t trust projections.

Keep your greed away: People invest when they hear of huge returns all because of greed and not even understanding the product. Never invest without understanding the product.

Know the track record of your agent and also ask your questions Usually, agents push plans which give them huge commissions. They hold on to regular customers who lack knowledge of these products or are ignorant customers and sell them these plans which may not be of use to them. They disappear once the product is sold and do not help in the claim processing. To avoid this go to a reliable agent with a good track record. If he fails to answer your doubts, might be he is misselling you.

Here are a few ways to help you from misselling by Health insurance agents:

Understand all policy exclusions
Do not miss the limits, the hospitals covered, diseases covered, and the sub-clauses. Understand all the policy exclusions before you buy the product.

Avoid under-investing or over-investing
If you are in your 20s with no liabilities you can go for a lower insurance cover in health insurance.

Find co-pays or limits if any
Many health insurance companies have room rent capping which means you are only eligible to claim an amount which is within this capping.

For eg: Your room capping is Rs.5000 per day and you opt for a room worth Rs. 7000 per day. You will have to bear that additional amount.

There are policies that come with clauses of co-pay for some parts of the claim (especially as you age). For eg: If your policy has a co-pay of 50% for a surgical procedure. You will have to bear half the expense. Find if there are words like co-pay, limits, deductible in the policy, especially in the terms and conditions.

Don’t have any unrealistic prediction of returns
Many are misguided on the terms and conditions of the policy. They are given unrealistic predictions of returns. When you decide to buy a policy, check their claim settlement ratio and the reviews given by other users.

Ask for a standard illustration or calculation
While purchasing an insurance policy ask for standard calculation. If you doubt the calculation, compare it with the example given in the insurance company’s website.

Read the product document yourself
Go through all the terms and conditions and benefits thoroughly before you buy it. Fill the form yourself. Do not let the agent do it for you also check the form before you sign it.

Clear Funds for EMIs

Make sure your income either rises or remains steady for as long as you need to pay the EMIs for your loan.

Among all these financial products, Insurance is top rated. Still mis-selling of it is so common in India that our honorable finance minister oncesaid, “because of this mis-selling, insurance is stumbling in India”.

In actuality, insurance should be bought to protect your financial life from unwelcome surprises and to cover your family needs when you are not around. However, most of the time it is bought to save the taxes. Moreover, attention has not been paid towards the details like :

  • Which type of cover it is providing? Regular income or a lump sum amount post-retirement or in case of death.
  • Does this policy –cover suffice to your requirement or not? If yes, then how much cover at which premium it is providing?
  • How much commission seller is getting through this deal?
  • Last but not the least what are the exclusions under which your claims will not be paid?

This ignorance of lack of knowledge makes you a mis-buyer where your seller is already considered as mis-seller.

Generally, a very thin line is there between mis-selling and fraud and mutual fund is no exception to it.

I can recount one case related to this where a retired person was convinced to invest a large amount in an equity-linked savings scheme.

When market crashed, he could not even cut his losses because his money was locked-in for three years. Whereas for a retired person, liquidity is essential.

Can you tell who is who here? Either buyer is mis-buyer or seller is mis-seller?

Because

  • Investors did not make enough enquiry before approaching a seller for investment. He was not aware of the things like entry and exit load on Mutual Fund, then open ended and close-ended mutual funds.
  • The distributor did not make him aware of these things (for his fat commission) despite knowing his age and financial situation.

Therefore, there is really no end to the argument that a buyer is mis-buyer or seller is mis-seller in case of financial products but what is most important is

The way out

In general, practice manufacturers of financial products have a bouquet of offerings, which suit the company, the distributor, or the customer. Given the complexity of financial products and the vast choice before him, it is not easy for a customer to know which product best suits his needs.

For that, he needs to have a good financial advisor beside him who will decode the information provided by agents to you and enable you to choose the right option. Moreover, for that it is important that buyer learns that he needs a financial planner. Click this link to know how to find a trustworthy financial planner.

So, what are you waiting for?

To avoid these kinds of financial mistakes and money mistakes in the future, creating a comprehensive financial plan is essential. If you are really interested in creating a personalized comprehensive financial plan for yourself and your family, I strongly recommend you to take advantage of our

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