Can You Trust a Bank as Your Investment Advisor? Know Here

Despite assurances of personalised attention, we often find our Relationship Managers absent when it comes to addressing basic banking necessities. Paradoxically, what becomes more evident is a persistent outreach from these managers, not to assist with routine financial matters but to promote enticing 'investment plans.'

Even if you do not hold a premium account, you may notice that as soon as you step into a bank, particularly a private one, it is almost certain that one or the other banker will approach you with what they claim to be a great investment plan or, at the very least, the best mutual fund to invest at the moment.

Given the rapid pace of today's lifestyle, many of us lean towards the convenience of consolidating all our financial requirements in one place. Moreover, some of us assume that similar to bank fixed deposits, all investments in banks will earn guaranteed returns.

However, customers fail to understand that banks are just another money-making business that does not provide free public services. The bank employees, including your Relationship Managers and tellers, are trained to cross-sell their products and services to hit their daily targets.

Hence, the question arises: Can You Trust a Bank as Your Investment/Financial Advisor?

Beyond fundamental banking services such as deposits and loans, most banks provide their customers with supplementary services and investment options. While investment services are primarily aimed at High Net Worth (HNW) customers, the intensified competition within the banking sector has extended this focus to almost every customer who enters a bank branch.

Banks establish partnerships with various entities, including life insurance companies, health insurance providers, mutual fund companies, and general insurance firms. These affiliated companies compensate the bank with commissions or fees for each sale facilitated. Notably, the commissions derived from the sales of these third-party products often surpass what a bank could earn through its own deposit offerings like savings accounts and fixed deposits. Consequently, the bank is inclined to prioritise products that yield the highest commission or fee, explaining why bankers may concentrate on promoting a specific product.

Furthermore, countless narratives circulate about the mis-selling of products in banks. In pursuit of lucrative incentives, bankers often cross-sell products without understanding the client's needs. For many financially uninformed individuals, entrusting their funds to a trusted bank may cause them to remain unaware of where their investments are directed.

Several Factors Contribute to the Prevalence of Mis-selling by Banks:

As discussed earlier, the bank earns substantial commissions and fees from the sale of third-party products. Hence, bankers are prompted to promote products with higher commissions, enticing them with elevated incentives. However, it is necessary to understand that the higher the commission, the greater the potential risk associated with the investment.

Many banks set specific sales targets for their Relationship Managers and other branch staff on a product-by-product basis. Therefore, if an employee falls short of achieving a designated product target, there is a propensity to promote that particular product to every customer encountered.

The range of products a banker can offer depends on the bank's affiliations. For instance, if a customer expresses interest in getting a Car Insurance Policy, the banker can only propose options from insurance companies with which the bank has established tie-ups.

Nevertheless, there could be certain good and honest banks and bank employees. That said, you should know whether they are capable of offering you sound financial advice.

Are Banks Capable of Offering Investment/Financial Advice?

Banks play a crucial role in providing a secure and efficient platform for individuals to deposit their funds into savings and fixed deposit accounts. These traditional banking services offer reliability and accessibility in managing one's finances.

Furthermore, banks extend their services by facilitating home and personal loans, adding to the financial stability and growth opportunities for their customers. Despite these advantages, the scope of banks in offering comprehensive financial advice may be limited.

The conventional banking model, primarily centred around transactions and credit services, often falls short in delivering the personalised and strategic guidance necessary for optimal investment and financial planning. The absence of tailored advice in wealth management and retirement planning areas may leave individuals without the nuanced insights required to navigate an increasingly complex financial landscape.

Therefore, seeking the expertise of a dedicated and unbiased SEBI-registered Investment/Financial Advisor becomes imperative for those desiring a more personalised and holistic approach to their financial well-being.

Why Could a SEBI-registered Investment/Financial Advisor be a Better Choice?

Having an Investment Advisor is crucial for several reasons. Firstly, an Investment/Financial Advisor provides personalised guidance based on your financial situation, goals, and risk tolerance. They possess the expertise to navigate the complexities of the financial market, offering insights that can help optimise your investment strategy.

Secondly, advisors can assist in creating a comprehensive financial plan, including areas such as retirement planning, tax management, and estate planning. This holistic approach ensures that various aspects of your financial life are aligned with your objectives.

Thirdly, during periods of market volatility or economic uncertainty, an Investment Advisor can offer valuable reassurance and help you make informed decisions to safeguard your financial well-being.

Ultimately, the presence of a skilled Investment/Financial Advisor contributes to a more disciplined and strategic approach to wealth management, promoting financial security and long-term prosperity.

How an Independent And a SEBI-registered Investment Advisor Would Help You:

We all seek assistance when navigating the complexities of investing. Rather than blindly relying on your Relationship Manager/banker or Investment Advisor, it's crucial to be aware of certain indicators that ensure you are entrusting the right person:

1. They Prioritise Education:

A reliable Investment/Financial Advisor avoids excessive financial jargon, instead, they simplify terminologies. Rather than focusing solely on making a sale, they make an effort to educate you thoroughly. Look for an advisor who provides comprehensive information about suggested options and explores alternative solutions.

2. They Openly Discuss Risk:

While bankers often talk about guaranteed returns, a trustworthy advisor openly addresses the associated risks. Whether a product is high-risk, medium-risk, or low-risk, a responsible Investment/Financial Advisor ensures you have a clear understanding of the potential downsides.

3. They are Transparent about Fees:

Unlike bankers, who may not disclose fees until after the fact, a reputable Investment/Financial Advisor is upfront about charges and commissions. Advisors working on a fee basis, rather than commission-based, minimise the risk of biased advice, as they earn a percentage of assets under management.

4. They Align Your Investments with Your Goals:

A credible Investment/Financial Advisor tailors investment plans to align with your financial goals. They prioritise understanding and working towards your objectives, whereas Relationship Managers/bankers are often bound by the goals of the bank they represent.

5. They Periodically Review Your Portfolio:

While bankers may lose interest after making a sale, a competent Investment/Financial Advisor consistently reviews your portfolio. They provide updates on past investments and suggest changes when necessary, demonstrating an ongoing commitment to your financial well-being.

To conclude:

In response to a surge in complaints about mis-sold products within banks, the Insurance Regulatory and Development Board on India (IRDAI) has undertaken several initiatives to curb such practices. Despite these efforts, banks persist in finding avenues to generate revenue through third-party products. Consequently, caution is advised for customers navigating investments via banks.

It is noteworthy that banks may steer customers towards life insurance or other third-party products, particularly when lucrative commissions are involved. In light of this, a prudent approach involves conducting thorough research before making any investment decisions and exercising vigilance in selecting an Investment/Financial Advisor.

If you have any complaints against a SEBI-registered investment advisory, you could report them on SCORES for faster resolution.

This proactive stance is essential to safeguarding one's financial interests, given the potential conflicts of interest that can arise when banks prioritise commission-driven product sales. As customers, being well-informed in our financial dealings ensures that our investments align with our objectives and risk tolerance, fostering a more secure and transparent financial landscape.

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KETKI JADHAV is a Content Writer at PersonalFN since August 2021. She is an MBA (Finance) and has over seven years of experience in Retail Banking. Ketki specialises in covering articles around banking, insurance, personal finance, and mutual funds and has been doing it for over three years now.

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.
This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.