Hiring a financial agent? Ask him these questions
An Article by Mr. Kartik Jhaveri, Mumbai
Why do we pay fees to a lawyer/doctor and most times don’t even ask our agent/broker for his charges?
Lawyer saves and protects you/your interest and a doctor cures you from ailments. Both give personalised and specialised advice. You don’t have to pay the agent because though he gives you personalised service he does not necessarily provide specialised advice and / or service. A lawyers or doctors services are not easily replaceable but there are thousand’s of agents who are willing to sell to us their products.
If you are thinking on the same lines you are absolutely correct but at the same time, we need our agents and we also need them to give us their services. If they can give us specialised advice we are also willing to pay them, isn’t it?
The question is how to choose the lemons amongst the peaches. Here’s your question bank:
Insurance: These days buying life insurance itself is a risk, as you can never say, for sure, if you have been sold the right product. Here are some basic guidelines to help shield you.
1. Ask the agent – what is the ‘type’ of policy he is recommending? Except for a ULIP (Unit linked Insurance Plan) or Term insurance, no matter how good the packaging is or how nice or how rosy the agents makes it sound – simply eject from that conversation. Close the matter there itself. Policies like endowment, money back and whole life are wealth destroyers today. If the agents tries to sell you this – that’s bad advice.
2. For ULIPs – Ask your agent – What is the minimum premium to be paid for the ULIP policy that you have or are planning to buy? How much are you actually paying? If it’s more than the minimum premium, well someone is making money by misguiding you. There are ways to get around – ask for minimum premium + top-up option. This works out to be far cheaper for you as your loads and expenses are lower but the agent may not like it – he loses commission. ULIP is a good idea but not for all; whether to fundamentally buy or not depends on your age, life stage and tenure of your financial goals – if the agents tell you this – that’s good advice. (Are you having a tough time selecting a life insurance policy? Click here to make it easy)
3. For Term – ask you agent – Is this the best deal? Does your company provide me the cheapest premium and if not – what are the additional benefits or compelling reasons to buy from you? Term Insurance is a good idea but how much insurance to buy depends on your beneficiary’s capability to generate returns, your budget circumstances, future of your liabilities and overall financial situation. Again if the agents tell you this – that’s good advice.
1) Ask the agent on what is the best investment to do? It is easy to identify product and commission driven agents – If immediately or within two minutes of meeting you if they jump into any product talk and sales mode just press the eject button and don’t waste further time. Unlikely that the person can really guide you well so meet the next person. You have to shop a little here.
2) Ask the agent – To comment on your current investment strategy? If he tells you what your asset allocation is and how it will help you, which product will be of use to you, which is irrelevant today, which to retain (equity shares included) – that good advice.
3) Ask the agent – What is the right strategy for me? If you agents is knowledgeable and can educate you on your strategy – current and future, asset allocation required, your risk return framework and what should be the methodology suited for your requirement then – that’s good advice. If he can show you a method to build wealth consistently over the next 20 or so years or as long as you want – that’s good advice.
- Ask the agent – What areas will he be able to give you advice on? If he can take care of everything i.e. budgeting, cashflow management, tax efficiency, insurance requirement calculations, retirement funding estimates, children’s career funding, goal funding and planning, estate planning, portfolio management – that is ideal. If he is well qualified, he will be able to offer you wholistic and comprehensive advice – that will be good advice.
- Ask the agent – What is his method of working? This speaks of his dependability and capability. You need someone who can take care of things while you are busy with your own work and he is easily available or someone is available to answer your queries and concerns as they arise.
- Ask the agent – How does he keep his knowledge updated? The power of knowledge can be easily seen – in the first two minutes of conversation even if it’s over the phone. If the person has a system of doing research, uses technology and can demonstrate that – then that’s good news.
- Ask the agent – How will he monitor and what technology support he uses? Will he keep you updated and if yes – how? Please take time to understand agents systems & processes for execution of your portfolio. If there are none – its bad news. If the agent can monitor your affairs independently – that’s being able to get good advice.
Remember you are not asking for much – this is quite a standard practice in most developed nations around the world. A good advisor must be able to answer to your satisfaction – only then would you judge and hire him to manage your hard earned money – isn’t it?
If you want to skip the above – Look for qualifications & credentials and if the person is someone who is not connected with any institution there will be no chance of any bias and most likely you will get – Good knowledgeable advice.
Can you trust your insurance agent?
IF a good-looking, well-dressed gentleman knocks on your door asking for help, would you turn him down?
If you answer, “No,” you could be the perfect victim for a burglary. Why? Because you made a snap judgment on the basis of appearance. Most scoundrels don’t look like scoundrels!
India has over 11.5 lakh (1.15 million) licensed insurance agents today, and many more who are practising illegally.
They look perfectly respectable. How do you make sure the agent sitting across you is genuine or someone trying to make money off your ignorance?
Some pointers for you:
1. Check for ID: Krishna Tripathi has an alarming tale to tell. An insurance agent knocked on his door to sell him a policy. A cautious man, Tripathi asked the agent for an identity card. The agent produced his wife’s identity card!
You need to know this! All insurance agents are licensed by the IRDA (Insurance Regulatory And Development Authority), and must undergo rigorous training before they can clear their certification examination.
The training equips them to advise people on their life insurance needs. A person without a license may not be fully capable of giving sound financial advice.
What you can do: Check if your agent has his/her IRDA-issued identity card. Verify that the card does, indeed, belong to the person sitting in front of you
2. Selecting a policy: The right way to select an insurance policy is not by going for the lowest premium.
Your decision must be based on a combination of growth and expenses.
What you can do: Ask to see a benefit or sales illustration. Ask for details such as growth, expenses and surrender value.
According to the rules, an agent can show you maturity values based on two rates: six per cent per annum and 10 per cent per annum. Your agent may show you lower, never higher, returns.
More important, these are not guaranteed, only indicative, returns. These vary with prevailing economic conditions. If your agent is promising a guarantee, ask him to give this in writing.
That should make him rethink his offer.
With the introduction of unit linked policies in the market, charges and expenses are critical to buying life insurance. You must have a clear idea about the charges on your policy and their impact on your final fund value.
Say Company X charges 20 per cent premium in the first year and four per cent thereafter. Company Y charges 30 per cent in the first year and one per cent thereafter.
You will have an idea of the more expensive one only if you have an illustration for both, assuming similar rates of return.
Ask the agents of both companies to give you the fund value on maturity assuming a rate of return of six per cent. The company that gives you a higher fund value is, obviously, the better choice
3. Check after sales service! Insurance does not end with purchase. In fact, that is when it starts.
A private life insurance company found out recently that policies lapsed mainly because of the lack of adequate agent servicing. In fact, most people had just forgotten to pay their premiums — their agent had not followed up with them — and were not even aware their policies had lapsed.
What you can do:
i. Get all relevant contact details of the company.
ii. Ask the agent who will service you in the future, or in his absence. After all, you will need his services when you make a claim, as will your nominees.
iii. Check if your agent will help you monitor your policy’s performance, especially Unit Linked Insurance Plans, since you will need to switch to get maximum benefit.
4. Check commission structures: Agents work on commission, typically, a percentage of the premium you need to pay. Not surprisingly, some agents may try to sell you high premium products you don’t even need. There is an upper ceiling on the commissions payable, which is regulated by the IRDA. This varies from product to product.
What you can do: You could ask your agent to tell you the maximum commission he will get on the sale of a particular policy. This tells you whether there are any vested interests of the agent in selling the policy
5. Check policy exclusions! Don’t ignore the fine print. All policies tell you incidents/ situations they will not cover, usually in fine print. Financial consultant PV Subramanyam says, “It is very important that you know these.
What you can do: Ask your agent to give you details of all exclusions in your chosen policy, especially those related to suppression of material facts and suicide — these will matter when you make that claim.”
Insurance is too big a decision to make without preliminary checks.
These five simple checks should ensure that the smartly dressed person sitting in front of you is not some fly-by-night operator.
When insurance agents mis-sell
A common problem with ULIPs: they are usually mis-sold.
Personally, none of the ULIP investors that I have spoken to actually know the extent and details of the charges that they would be paying. The problem is three-fold:
- Misrepresentation on the part of the agent
- Lethargy on the part of the investor
- Huge incentives on the part of the insurance company. Insurance companies set steep targets for their agents and offer big ticket goodies (laptops, foreign holidays, the works) to help meet targets. The loser: the investor, who ultimately bears the cost.What agents don’t tell you
Prashant was asked to pay a premium for only the first three years. Why? This is because the agent’s commission is higher in the first three years.
In the bargain, Prashant is losing out. If he wants to withdraw his money after three years, he will not get much in hand, because the charges are usually higher in the first three years; this eats into a major chunk of the premium.
If the agent claims that the policy will continue even if you stop paying the premiums after three years, this means that the premium amount you paid in the fund within the first three years, will be used to keep the policy in force after you stop paying premiums! Once the amount in the fund is exhausted, the policy will automatically expire.
- When buying a ULIP, ask about all charges involved.
- Track past performance of the ULIP (if applicable) before buying a policy.
- Compare ULIPs of various insurance companies to arrive at the best plan.
- You could pay your premiums in smaller chunks every month through a Systematic Investment Planning (SIP) approach. This would save you the hassle of paying a lump sum.
The solution is pretty simple. Companies should stop doling out expensive prizes to agents. This will automatically reduce mis-selling and in turn, costs for the investor
Tips to ensure your agent doesn’t cheat you
GONE are the days when financial products meant only fixed deposits and small savings schemes. Now, there are an array of investments for your benefit!
For instance, there are insurance plans that provide equity and debt investment like Unit-Linked Insurance Plans, investment plans that provide insurance like Systematic Investment Plans + Insurance and so on.
With so many products, it is easy to get sweet talked (by an agent) into investing in the wrong schemes. And that’s probably why you find young people with an insurance cover that they don’t need and many more such cases of mis-selling.
The intense competition amongst financial players has only made matters worse. Distributors and agents with unattainable sales targets pitch products left, right and centre. After all, what do they have to do with your needs and goals, they earn their commissions!
However, mis-buying is as much a problem as mis-selling. Too often, the real culprit is staring back at you every time you shave!
So, here’s what you can do to avoid getting caught in the net.
– Firstly, do you need the investment? If you have no dependents or loans to pay, say goodbye to the insurance agent!
– Verify the credibility and knowledge of the agent before handing over your money. Ask him for three references. Speak to those clients and find out their views.
– When it comes to your money, no question is foolish. If you do not understand even a small aspect of the product, ask! Buy only after you are thoroughly convinced and have understood everything. For instance, I met a top film actor, producer and director recently. He had no qualms asking the most basic questions such as, ‘What is equity’, ‘Why do you say equity gives the highest return?’ I felt honoured at spending half a day with him and a few of his friends.
– Pay attention to all that your advisor or agent speaks. Do not take things at face value. Whatever your agent says might not necessarily be applicable to you.
– Go through every piece of paper you get and do not sign on the dotted line till you are doubly sure that it is a good investment idea. If there is a slightest doubt, say NO. It is your money; do not feel ashamed to keep it!
– Do not jump to invest in the plan. Take time out to research the investment. You can do this by finding out more about the scheme on the internet, in leading financial papers etc.
– If it is an insurance policy, ask for an illustration from the competitor. This will help you get a better comparison.
The games that insurance agents play
Not surprising. Insurance has become the refuge of many a mutual fund distributor, as that business has folded up since August 2009. The insurance agents have quite a few tricks up their sleeve. Not everyone is bad and uses these unsavory tricks. But, you better know them. Here they are:
1) Old wine in a new bottle
The agent is constantly on the lookout for business. If organic growth becomes a problem, existing patrons come in handy! That is when you get calls to surrender the three year old ULIP (unit linked insurance plan) to put it in, what else but another ULIP or ULIP based pension plan. Only that the insurance product charges are front loaded and you would have just completed paying most of the charges in the first product and now you could start off with the second one.
2) Government guarantee!
This is a ploy used by LIC (Life Insurance Corporation) agents. They keep talking about sovereign guarantee. Guarantee in a traditional product is only for the sum assured. Every insurance company (including private players) guarantees the payout of the sum assured. It is only the bonus payout that is not guaranteed. For ULIPs, this anyway does not apply. So, this is a total con game.
3) New products that no one has heard of
Heard of Jeevan Amrit or Jeevan Sadhana? These are not LIC plans. They are plans conjured-up by putting together a few insurance products of LIC . Also, interestingly, the payouts which come in at various points are assumed to be invested in National Savings Certificate, Public Provident Fund, RBI Bonds etc. Then they calculate the returns and tell you that their Jeeven Amrit or Sadhana gives 8 -10%. Don’t be misled by this. The higher returns are because of these other products, not insurance. I have still not understood why they should show reinvestment in other products, when they are talking about insurance. And, how someone falls for these.
4) 6 & 10% returns in a traditional product
Recently, I found that a client of mine has gone for Jeeven Saral, a traditional policy of LIC. However, the agent had given an illustration with 6% & 10% returns! This was to be used for ULIP policies, where this is a possibility. In traditional policies, 10% return is virtually impossible. You would readily understand, why they use it then.
5) Insurance on the child
There are products for the benefit of the child, where the child is the insured. It’s absurd, as the child is a dependant and insurance on the child is of no practical use. Yet, these kind of products are sold and are bought by emotionally charged parents, ending up with a bloomer.
Sudhir clutched his head when he came to know of these. He just bought a child insurance on his daughter and he remembers buying a Jeevan Aradhana or some such product, which is one of those ‘intelligently’ packaged ones.
For those buying financial products, a basic level of financial literacy would help. Studying and doing some basic research, is a good idea too. If one is not sure, get an unbiased opinion from someone who knows about insurance. Else, it becomes a costly mistake, which lingers around for years.
5 steps to finding your perfect financial advisor
A common question seems to be nagging most individuals: “How do I find the right financial advisor?”
A financial advisor is not a ready off-the-shelf product. Just as you would exercise due diligence in finding a life partner, I recommend that you make sure that your match with your advisor is made in heaven. Here is a quick checklist that may help.
Trust and Confidentiality
Call it by any other name, like ethics or integrity, if you please. You do not normally agree to get married the first time you meet, so why should a relationship with a financial advisor, which potentially could extend beyond your life too (for your family), be any different? Take time to meet in different environments (your home, your office, the advisor’s office) and look for tell-tale signs such as an offer for a deal that’s “too good to be true”. (My experience tells me that it normally “is too good to be true!”) Find out if your advisor pays taxes honestly, for example: his personal behavior will obviously spill over to his professional dealings.
Trust alone is not enough. Does your advisor have the knowledge to be able to offer you the right product, and more importantly, the right advice? What is his belief in continuing education, and upgrading his skills? Has he completed a professional, reputed course such as that of a Certified Financial Planner? The world is changing, and the financial world is doing so at breakneck speed. If your advisor is not keeping himself abreast with the latest, you are likely to be the loser.
There must be a genuine desire in your advisor to serve you. For a start, ask your advisor for a service level agreement. Are there a bunch of standard services that he will provide? Are there items on the list which he will not provide and which are essential to you? Haven’t you been able to easily make out which air hostess is doing her job and which one is thrilled to bits at being able to serve passengers in the flight? You need an advisor who’s passionate about his work.
Please spend time with the advisor understanding the type of clients he services. Your advisor could have expertise in dealing with young software professionals; if you are retired and less comfortable with dealing with emails as the primary source of communication, you may need to look elsewhere. If the advisor has a clear age or demographic concentration for his clients, he may be disinclined to meet the needs of a different profile of client.
Many of my clients have asked me for references before they sign up, and I encourage that practice. I was, however, more than impressed recently with a prospect from USA who insisted on getting at least two references from the Bay area where he resided. He then proceeded to meet them personally. In his subsequent visit to India, he visited our office, and only then decided to sign up.
I only wish that each of you take these pains before signing up your financial advisor. Keeping your eyes open before getting into a “marriage” with your financial advisor will surely improve the chances of a long, financially healthy relationship.
An Article by Mr. Kartik Jhaveri, Mumbai