Share markets around the world have had more than their share of scandals. These range from accounting fraud, rigging, insider trading and audit committees not doing their work to research reports for different audiences, back dating of ESOPs and initial public offerings.
You may have lost a fortune due to one of these.
While it is true that you may be able to recover some or all of your losses, due to broker misdeeds or misinformation, keep in mind that your broker and other outside forces frequently aren't solely to blame.
Buyers beware
During bull runs, people often tend to willingly hand over their money to complete strangers without verifying the stranger's claims of credibility. After giving their money, people simply sit back and wait for the returns to start pouring in.
In addition, if they don't get rich, and lose a portion of their initial investment, they blame the whole world. On occasions, they go to the authorities, and may even sue.
Look before you leap
If you buy a mutual fund, unit linked life insurance or direct equities, you have some rights. But you also have some obligations.
Agencies can only do enough to reach information to your doorstep. However, as an intelligent investor, you also have an obligation.
Learn about the person or organisation you entrust your money to, and the investments to be purchase with your money. The first step is making sure you have made a strong effort to hire the right kind of help, before blindly handing over your cash.
Before you hire an investment advisor ask him for references. Hiring someone to give advice does not absolve you as an investor, of the responsibility for accepting that advice. In case you do not know how the adviser is compensated, then ask.
Once the decision has been made to hire outside help, your obligation to pay attention and remain fully engaged in the process doesn't disappear.
As an investor:
- Read and understand every piece of paper that you are given.
- Every disclosure document must be reviewed until you understand it.
- Question everything that you find confusing.
- Ask yourself -- do you need it at all?
- Every investment that you make, must be researched until you are positive that you completely understand it.
- Never sign anything that you don't understand, and always get a copy of everything that you sign.
- When in doubt, ask. If still in doubt, say NO. It is your money, so do not feel ashamed.
- Take responsibility for your actions. 'Mis-selling' is as much a problem as 'mis-buying.'
- Play one vendor against the other to find out about the loopholes.
- If it is an insurance policy ask for illustration from the competition to be used as a base for comparison.
The price of free advice
If you have chosen well, the person providing financial advice to you has a fiduciary obligation to give you good advice. Of course, that is true only if you are seeking fee-based advice. If your banker or broker is your advisor too, then be careful. Set realistic expectations and, if it looks too good to be true, it probably is.
In case you are wondering how the adviser landed that job, it's time you changed your banker!
Remember, if you do not know how an advisor is being paid, you are paying (perhaps) a price far, far higher than a fee-based planner. If you have not hired him (i.e. you are not paying him a fee), you cannot sack him either.
That is the price of free advice.
The author, P V Subramanyam, is a financial domain trainer.
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