-What is mis-selling? How to identify & save yourself.

Mis-selling of financial products is rampant in India. Banks, Insurance Agents and Mutual Fund Distributors often mis-sell wrong financial products which do not suit to the requirements of their clients. There are many reasons that cause mis-selling of financial products by these intermediaries

• failure to understand the customer needs properly, 
• poor risk-profiling of customer, 
• inappropriate or wrong advice to customers in order to earn commissions and sales incentives.

What is mis-selling of financial products? 

Private Sector and Foreign banks cross sell the financial products of third parties to earn distribution commissions. The relationship managers in these banks aggressively sell risky financial products like equity mutual funds, ULIPs etc. to their unsuspecting customers, mostly senior citizens.

These bank managers highlight the high returns earned on these products in the past, but conceal the inherent risks associated with such financial products like equity funds. The returns on mutual funds depend on the vagaries of stock markets and are not guaranteed. When markets are down, there can even be capital loss in equity mutual funds.

A senior citizen needs guaranteed returns without any loss in the principal amount. Products like equity mutual funds do not suit to the needs and risk-taking capacity of senior citizens and hence tantamount to mis-selling.

Financial products like Bank Fixed Deposits, Senior Citizens’ Saving Scheme, post-office saving schemes or Government Bonds suit better for the needs of older people. These products offer guaranteed returns and there is no fear of loss in the principal amount. 

On the other hand, the risk-taking capacity of young people, who are in still in their earning cycle, is high. They can afford to invest in risky financial products in order to earn higher returns. The distributor or agent needs to properly understand the needs and risk profile of customers and offer financial products that are best suited to them.

How do you save yourself?

There is no magic wand to save oneself completely from the onslaught of mis-selling of financial products. However, the following steps can help the investors to safe-guard themselves from mis-selling to a great extent.

1) Gullible investors are generally taken for a ride. Financially illiterate customers need to acquire minimum knowledge of various financial products through internet and other means. They should take investment decisions based on the advice of a trusted Financial Advisor.

2) Whenever an agent or distributor aggressively pitches to sell a particular financial product, do not just get carried away. Read the product brochure carefully, collect more information about the product through internet, take a second advice from other sources and then only make an investment decision.

3) Ask questions about the following aspects of product – market risks associated with the returns, lock-in period if any, regulatory authority that has approved the product, premature exit load and other charges.

4) Greed leads to bad decisions. High returns come with high risks. Take a rational decision based on balanced risks.

5) In case a bank has mis-sold a financial product, you can approach the banking ombudsman for redressal, under the amended RBI Banking Ombudsman Scheme.