Is Your Bank Really Your Best Investment Advisor?   Jan 11, 2011

When we think of banks, we think of trained, knowledgeable, intelligent advisors that will tell us exactly what we need to do, in terms of everything from cash in our accounts to documentation to investment avenues, advisors who will always keep us up to date on the best place to invest our hard earned money.

With the recent spate of articles in the news about bank advisors that are blatantly mis-managing their customers money, eyebrows are raised as to whether this impression that we have of our bank Relationship Managers (RMs) is in fact true to form.

Far from managing your relationship with old fashioned care and dedication, keeping your interests at heart, some RMs appear to be working for themselves more than for their clients.

The key to dealing with this reality, is to understand the situation fully.
Let’s see why your bank RM might not be entirely unbiased in his or her recommendations.

As a bank employee, your RM’s salary is structured into a fixed and a variable pay component. This means that part of his or her salary is fixed, and part of it gets paid out based on whether or not your RM has met certain work related targets. These targets might include things such as acquiring new clientele, and also things such as product sales. For example, an RM from a reputed international bank once candidly admitted that depending on how many ULIPs he sold, his bonus would be boosted.

The fault is not with the RM. Your RM is merely doing the job as required within the remuneration package stipulated. The fault is with the system, and it will most likely take some time for this system to change and become entirely customer-centric.

But, that doesn’t mean that you are helpless. There are things that you can do to ensure that you do not get sucked into the wrong investment product. The first thing is to ask the right questions.

PersonalFN is here to help you with that.

There are 2 types of questions you must ask before investing in a particular product.

The second type in both order and importance is questions about the product itself.

When you invest in a product, it is absolutely essential for you to clear all your queries about this product / investment avenue before investing in it.

If your RM has been correctly trained, which he or she most likely has been, then all your queries will be answered with the correct facts about the recommended scheme / instrument.

If your RM is recommending certain mutual funds or other investment products such as ULIPs, here are some essential questions you should be asking about the product specifically:

  1. Does it invest in equity?

  2. How old is this scheme / product?
    If it is new, for what specific reason is it being recommended? What is the benefit of choosing this product rather than an existing peer of the product?
    If it has been in existence for some time, please indicate the past performance over a long time period for example what are the 1 year, 3 year and 5 year returns?
    How has it performed against its peers in the same category of investment? For example, if it is a midcap fund, how has it performed vis-à-vis other midcap funds in the same time period?

  3. Is there a lock in period? Do I need to invest once, regularly, or in a continuing manner? What happens if I halt my investment after some time?

  4. What are the tax implications?

  5. What are the different charges associated with the product? How will they affect my returns?

  6. What kind of returns can I expect on this product? Is that pre or post tax returns?

If the product is linked with equity markets i.e. it invests in equity, even partly, then your own investment horizon should be atleast 3 years.

For example, if you are investing in a balanced fund, which has a major portion (65%) of its investment into equity, then be sure to have a 3 year investment horizon at least.

Also remember, equity means market risk, so if your risk appetite and tolerance is low, you might want to invest in a more debt oriented product such as an MIP (monthly income plan with up to 30% of its portfolio into equity), or a straightforward debt investment such as an FMP (fixed maturity plan) or an FD. As a prudent investor, you must be sure to get the details of the product from your RM / advisor, before investing in it.

More important than the product details, you must ask the first type of question.
You need to first know whether this product is good for you from a financial goal perspective.

If you are planning on utilizing these funds in the short term (less than 3 years), then you should be investing into debt or any fixed income product, to avoid exposing the funds to the risk of the equity markets.

If you have a medium term goal (3 to 5 years), then you can invest partly into equity, majorly into debt, letting the equity component give your investment a boost, while the debt component ensures that you do earn a safe return each year.

If you are investing for the long term (more than 5 years) then you can invest predominantly into equity for this goal.

Remember that as your goal draws nearer you should start shifting the funds from equity to debt, so that when your goal approaches, you will be redeeming the money from debt instruments that are not affected by equity market risk.

Also keep in mind your existing portfolio. If you are already heavily into equity, and you are nearing retirement or have another major financial goal approaching such as a house purchase or your child’s education, then you need to be invested into debt instruments.

Similarly, if your existing portfolio is more into debt than equity and you are a young investor with atleast 10 years to go till your retirement, you can invest more into equity to make the most of the remaining time horizon before your goals.

These are the questions you must ask yourself, and then discuss with your RM before going into specific product details.

Your Call To Action

Gone are the days when you could count on your bank RM to provide you with advice that is suited to your needs and will not line your RM’s pockets. This is the reality today – that your bank RM is no longer working only for you.

The only way to tackle this is to have an unbiased advisor – and to check everything that your bank is recommending against your unbiased advisor. Your unbiased advisor / financial planner will work in your interest and will give you the real truth about where is the best place to put your hard earned money.

Also – you must educate yourself. Read the newspapers, magazines and also a good personal finance website, to boost your own knowledge and awareness.

If you would like to make the most of your finances and build as much wealth as you can, speak to an financial advisor from PersonalFN today. Or else, simply ask for a free consultation. We would be happy to assist you with your financial planning needs.

Add Comments

Jan 11, 2011

This is one of the most informative posts i have ever read on personal finance. I can't wait to share this insight with my friends.
Thanks guys!
Jan 11, 2011

Nice article. However this tackles only one side of the coin. Add to these RMs, those "family financial advisors" or the self-proclaimed "agents" (of banks/Mutual Funds) are also mis-sellers of the financial products. I believe you need to publish a separate document on these as well!
Jan 11, 2011

What about the 1% charges, the bank make on investments based on RM's advices ? That should good enough for the RM s benefit to offer unbiased advise to clients.
          HDFC bank charges 1% initially which should really be on actual performance but done along with the Investments although there is no mention of such charge in their Internet site. Is the bank justified to make such charge ?

Jan 11, 2011

Good article

Jan 11, 2011

This is one the BEST information that has come to me over the last few months & is more than 100% correct, thanks to Personal fn to creating such awareness!!
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