Is it a genuine investment advice or fraud by misselling bad products as good ones? How to know So, it would be far more useful for people to learn what not to do with their money. This type of financial literacy is not available anywhere, and has to be learnt through bitter personal experience
The first principle is that you must not fool yourself, and you are the easiest person to fool.” When renowned physicist Richard Feynman said this in a speech at Caltech, in 1974, he was referring to the realm of science and work of scientists. However, the essence of this message applies broadly to any discipline that involves research and analysis. This includes investment research, whether it is conducted professionally or personally. In investing, the problem is far worse because there are others trying to encourage people to fool themselves. In fact, it’s an entire industry now, and the impact is widespread enough for the regulator to focus on.I’m referring to the so-called finfluencer problem. This issue is completely different when considered from the regulatory or policy point of view, and that of an individual investor. For the former, the problem is that anyone offering advice should be regulated. This is not what the individual investor cares about. All of us have faced poor, self-serving advice and mis-selling from regulated intermediaries. It does not matter to the investor whether such people have a certificate or a piece of paper. The person at the receiving end suffers the same financial loss and damage, whether the bad advice comes from a YouTube finfluencer or a bank relationship manager.
For all practical purposes, let us ignore the belief that regulated entities do not give bad advice. If we work out a methodology for recognising and ignoring bad advice, it will serve us equally well, no matter who is providing it. This redefines the problem as one of investor education or financial literacy. It is true that one cannot protect investors who don’t have the knowledge or willingness to be protected. This means that most people need basic financial literacy, which typically takes the form of knowing what to do with money. It involves teaching people how the investment world works, the different types of investment options available, who they are useful for, and how they serve their financial needs. While investors should definitely learn about all these facets, this is not where people usually go wrong.
The mistake made by victims is in not realising when someone tries to hawk bad financial products dressed up as good ones. If you are in the market for financial products, then someone does just that. This is not an exception, but the rule. Sooner or later, everyone is sold undesirable and unsuitable financial products. So, it would be far more useful for people to learn what not to do with their money. This type of financial literacy is not available anywhere and has to be learnt through bitter personal experience. In a recent instance, a friend has been bombarded by calls from his bank’s ‘account manager’, who keeps asking him to invest in mutual funds directly through the bank. The salesman tells him how he must have heard about the advantages of direct investing, and reminds him of the opportunity to do so through his bank account.
When my friend asks him whether the investment is in direct plans of mutual funds, he never gets a clear, straightforward response. Basically, the bank official uses the word ‘directly’ in the normal sense of the word, but avoids saying ‘direct plans’. It is obvious what’s going on in this case. High-cost, non-direct funds are being pitched to the account holder, but some variation of the word ‘direct’ features in almost every conversation. I am almost certain that this trick is commonly used by bank officials and the salespeople are careful to say nothing that is technically false or actionable. However, the entire sales pitch is dishonest and even fraudulent in spirit. Compared to these tricksters, many of the YouTube finfluencers would actually appear to be innocent children. So, what type of investor education do you think will help people against such tricks?
By the Author CEO, VALUE RESEARCH
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(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
This story originally appeared on: India Times - Author:Faqs of Insurances
