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Do you trust your investment advisor blindly? - Outside View by PersonalFN

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Do you trust your investment advisor blindly?
Dec 26, 2014

"Invest in this stock and double your money for sure in 3 months". "Earn guaranteed 30% returns by investing in this scheme for just 2 years". How many times have you heard people make such claims? There are many people out there who try to take advantage of the lack of knowledge on the part of investors. And, more often than not these so called "advisors" have an extremely luring sales pitch that can easily mislead investors.

A large number of fraudulent entities provide stock trading "tips" to investors but are not registered with the Securities and Exchange Board of India (SEBI). For making money, these entities provide tips which might not be backed by appropriate research and often are rested upon the momentum in the market. Therefore, when the momentum wanes, what investors are left with is a feeling of betrayal; because after all, the foundation of tips is based on momentum playing and not prudent long-term investing. In the thrill to earn handsome returns quickly, nave investors get carried away by the claims made by these illegal companies, but what they fail to recognise is that the thrill can eventually leave them in lurch or pain.

You see, it is noteworthy that not only illegal companies, but sometimes even a relationship manager of a known legitimate bank or an established financial services company or an authorised insurance agent may try to lure you with some products which are unsuitable for your financial well-being. Some sales executives / agents don't care whether the product will benefit you or not, as long as it fills in their pockets with big fat commissions or variable pay. Some mutual fund distributors - try to sell those funds to clients on which they earn higher commissions, irrespective of the client's investment objectives. This has filled the portfolio of many investors with numerous mutual fund schemes, stocks, chit funds, etc. Although many might feel that this might make their portfolio well-diversified, it actually leaves them with a sub-optimal portfolio in terms of quality and asset allocation.

It is imperative to recognise that if you invest your hard earned money on account of some random stock trading bets or into some unsuitable investment avenues, you are not only harming your own finances but also jeopardizing the future of your loved ones. At PersonalFN, we have listed down certain dos and don'ts that you must follow in order to protect yourself and your families from unscrupulous advisors / agents / distributors / relationship managers.

Dos

  • Choose your financial advisor with due diligence

  • Carry out a thorough background check and analyse the track record and qualifications of your advisor

  • Read all the investment documents carefully

  • Read the features and benefits of the investment products, to assess whether they suit your risk profile and investment objectives / financial goals

  • Carry out at least some basic research

  • Ask questions to your agent / distributor / relationship manager which are relevant in context of your investment objective / asset allocation / financial goals

  • Monitor your investments regularly to know where your investments stand and see whether they are meeting your objectives / financial goals

  • Take sufficient time while doing your investment / financial planning
Don'ts
  • Don't have blind faith in your agent / distributor / relationship managers

  • Don't always go by big brands

  • Don't invest as per any advice given by companies that are not registered with appropriate regulatory bodies

  • Don't sign blank cheques / forms

  • Don't blindly believe anyone offering "guaranteed returns" (%) on market linked products

  • Don't look for ways of making quick money

  • Don't invest money just because your relatives / friends have invested in schemes

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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