Should You Trust a Bank for Investment Advice?

Mar 10, 2022

Listen to Should You Trust a Bank for Investment Advice?

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About a month back, my sister received a call from a bank official saying he is Sandeep, her new Relationship Manager. Sandeep asked her to save his number and get in touch with him in case of any banking requirements. My sister saved his number, thinking it is convenient to have one contact for all her banking requirements. A few days back, she again received a call from Sandeep asking for an appointment. My sister was hesitant at first but decided to visit the branch as he seemed to have a few investment options that would suit her requirements. My sister is a baker, and she has had some funds lying in her savings accounts for quite a few months. She cleared with him that she is planning to buy a new property for business expansion and doesn't want to invest for the long term. Sandeep explained to her a couple of investment plans. Although he insisted on signing the documents on the same day, my sister asked for a couple of days to think about it. As she began her research about the suggested product, she realised both of those plans were actually investment-cum-insurance plans with a policy term of 15 and 22 years!

This is not a new scenario. If you visit a bank, especially a private bank, one or the other banker will come to you with a so-called great investment plan or, the least, the best mutual fund to invest in right now. With today's fast-pacing lifestyle, most of us prefer the convenience of having all our banking needs addressed under one roof. So, should we rely on a bank or a Relationship Manager for investment advice?

Considering the trust with which the people keep their hard-earned money with the bank and the banking relationship, many individuals blindly rely on the investment advice given by the Relationship Manager. However, a simple answer to this question is - No.

Should You Trust a Bank for Investment Advice?
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So, what are these investment services offered by the banks?

In addition to the primary banking services like deposits and loans, most banks offer certain value-added services and investment services to their customers. The investment services are mainly targeted at High Net Worth (HNW) customers. Still, with increased competition in the banking sector, almost every customer walking into the bank branch is targeted for it.

The banks have tie-ups with several life insurance companies, health insurance companies, mutual fund companies, general insurance companies, etc. These companies offer a commission or fee to the bank for every sale made. The commissions earned on the sales of these third-party products are usually far higher than what a bank could earn with their own deposit products like a savings account and fixed deposits. Hence, the bank pushes the product that gives them the highest commission or fee. This is why you would see the Relationship Manager focusing on one particular product.

Why do the Relationship Managers miss-sell the products?

There are numerous stories of selling the wrong products (miss-selling) at banks. Intending to earn high incentives, the Relationship Managers often sell the products without understanding the customers' requirements. Many financially illiterate individuals do not even realise where they are investing as they are giving their money to the bank they trust.

Here are the few reasons why the Relationship Managers miss-sell the products:

  • As we discussed, the bank earns high commissions and fees on the third-party products they sell. Hence, the bank pushes the Relationship Managers to sell the high commission earning products by offering high incentives to them. However, the higher their commission, the riskier the investment could be.

  • Most banks give product-wise sales targets to their Relationship Managers. So, if the Relationship Manager has not achieved a specific product target, they will try to sell it to every customer they meet.

  • The Relationship Managers can sell only those products with which the bank has tie-ups. So, if you want to buy a Cancer Insurance Policy, they can suggest to you only the ones offered by the insurance companies they have a tie-up with.

Should you go to the bank if you are looking for a particular third-party product?

If you are looking for a particular third-party product, let's say a term insurance policy, it is advisable to check for premiums or fees directly with the insurance provider. In most cases, you will find the best deals online. Online term plans are more affordable than offline term plans as it is a cost-effective way of acquiring and serving the customer. Most insurance products are available online and offline with a considerable premium difference. In the case of mutual funds, you should check the fees charged by the bank and your financial adviser and choose the one that charges the least fees.

How do you know whether you should trust your Relationship Manager?

 

We all need a little help when it comes to investing. But instead of blindly trusting your Relationship Manager or Financial Advisor, it would help if you look out for these signs to know you are trusting the right person:

  1. They try to educate you:

    If your Relationship Manager is using a lot of financial jargon, it might be a sign that they are just pretending to be a finance expert. A good financial advisor will simplify the terminologies to you, and instead of simply making a sale, they will try to educate you in each way possible. So, see if your advisor is providing you with complete information about the suggested options as well as other alternatives.

  2. They will be upfront about the risk:

    Most times, when talking about returns, the Relationship Managers tell their customers that the returns are guaranteed. However, the returns are guaranteed 'up to' a certain percentage in most insurance products. Similarly, the bonus offered in life insurance is never guaranteed, but the Relationship Managers show the calculations of the returns based on past data. A trustworthy Relationship Manager or Financial Advisor will openly talk about the risk involved so that you have a clear idea of whether the product you are investing in is a high-risk, medium-risk, or low-risk product.

  3. They will be upfront about the fees:

    The Relationship Managers generally do not disclose the fees that are charged to you from the investment amount. Many customers come to know about these fees after receiving the statement. However, a responsible Financial Advisor will be upfront about the fees and commissions. You can trust the advisor who tells you exactly how much of your funds are getting invested and charged. Besides, the banks and some Financial Advisors work on a commission-basis, so the Relationship Managers or Financial Advisors could be biased towards the investment options that offer them a higher commission. But the Financial advisors that work on fee-basis receive income as a percentage of assets under management, so there is less chance of biased advice.

  4. The advice will be in line with your goals:

    A trustworthy Financial Advisor will remember your financial goals and customise an investment plan that suits your requirements the best. They will work towards achieving your goals and will be equally sensitive towards them. However, the Relationship Managers have to work in line with the goals of the bank.

  5. They periodically review your portfolio:

    In most cases, the Relationship Managers do not bother to check your past investments and update you about your portfolio. Once the sales are made, they receive their commission/incentives, and now they have to look for other customers to meet their new targets. However, a good Financial Advisor will periodically review your portfolio and suggest to you if any changes need to be done.

To Conclude:

With numerous complaints about wrongly sold products in the banks, India's Insurance Regulatory and Development Board (IRDAI) has been taking several measures to stop miss-selling at the banks. However, the banks still find ways to make money through third-party products. It is advisable for the customers to be careful while investing through banks. If you are unaware, the banks will most likely try to sell you a life insurance product or other third-party products in case they are earning a high commission on it. Therefore, you should always do your thorough research before investing and be careful while choosing your Financial Advisor.

 

Warm Regards,
Ketki Jadhav
Content Writer



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