Wednesday, January 22, 2014

Are Bankers good investment advisors

Quite recently I went to the leading private bank in my area to submit an application for address change. The lady was helpful and did no fuss about anything. She helped me in understanding the difficult form (I guess, address change form was more complex than the account opening form itself).

Once the main task was completed, she asked me if I had time to listen to a wonderful investment product the bank had launched. I was alerted by the word ‘wonderful’. My logic is simple: if the product is wonderful, bank need not sell it. People would be eager to buy it. This was the first time that the banker had approached me, so I thought of listening to it. She started to explain the wonderful product. The conversation is as below:

Lady: Sir, you are just in time. Only 1 day left before this product would be discontinued.

Me: Ok (---Since I am lazy by nature, such 11th hour things puts me off. Cos I cannot do the things in a hurry)

Lady: This is a unique product which would serve your investment as well as insurance purpose

Me: Ok (---OMG, I was being sold ULIP)

Lady: Sir, this product is of 20 years and you will have to pay only for first 7 years. This product puts your money in equity and equity oriented product and gives you guaranteed returns

Me: What? Guaranteed returns in equity?

Lady: I meant guaranteed highest NAV to you which would mean guaranteed highest returns.

Me: And how is that ensured?

Lady: Sir, the bank pays you if the equity market goes down

Me: Freak, that is a plain lie. Can you write it and give it to me (---Yes, I said that)

Lady: Sir, it is true (---I noticed that she did not comment on writing part)

Me: Can you please explain how all this is done and why bank would pay me if the markets goes down

Lady: Sure Sir. Suppose you pay 1 lakhs per year (OMG, this lady started my investment with 1 lakh/year), the bank would go and buy units from our own Mutual Fund schemes. So as you can see, this would be done every year. So if the markets are down, you would get large number of units. If the markets are up, you would be getting that NAV as the highest NAV and the returns are more. Plus you get insurance of 5 times your annual premium.

 Me: So if the NAV goes up from 10 to 11 in 1 year, my returns are 10%.

Lady: Yes sir and all this is tax free. So now you can imagine that your returns would be around 12% na

Me: Ok, now if the NAV remains stagnant at 11 after 7 years, I would still be paid this NAV cos you guaranteed highest NAV, right?

Lady: ummmm

Me: Top this with the charges that you would deduct from me on basis of units collected and not flat charges

Lady: ummmmmm

Me: Do you think, I should buy this?

Lady: Sir, you forgot about the tax angle

Me: What tax angle?

Lady: Sir, benefits under 80C and 10(10D)

Me: 10(10D) would be useless to me as this is related to the tax exemption on maturity of insurance policy. So that is at the end of 20 years. And I can get 80C benefits from any mutual fund as well.

Lady: Sir, mutual fund has locking of 3 years

Me: From the conversation it seems, your product has locking of 7 years

Lady: Yes, sir. So you can buy our mutual funds

Me: (---too much. I did not know that people can change topics in such short span) Why should I buy mutual funds from bank? I will do that from AMC

Lady: Sir, are you an insurance agent or mutual fund seller

Me: Nopes, just a common man who lost good chunk of his hard earned money in endowment plans. I hope my address change would be done in this week.

Lady: Yes Sir.

Note: Always be aware of words like ‘wonderful product’, ‘only last 2 days left’, ‘guarantee’.

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