Mis-selling occurs when you receive inappropriate advice, the risks are not explained, or you do not receive the information you need and end up with a product that is not suitable for you. A bad buy occurs when buyers are completely unaware of the details and complexity of the financial product.

Due to the competitive nature of the financial services industry, sales agents provide heaven for potential consumers to achieve unrealistic sales goals. Customers are also conveniently unaware of essential costs. Some people even make promises they know they will never keep. Mis-selling is a term used to describe a situation that borders on fraud. This is what happens when young single people are marketed into endowment policies or when retirees are persuaded to buy pension plans. Mutual fund investors are tempted to shuffle their portfolios every three months, and novice equity investors are encouraged to buy derivatives without being informed of the risks.

Many agents and brokers say that all they do is hard sell and they have to do it to meet quotas and receive commissions. The line between overselling and hard selling is very thin, but more and more agents are blurring it. Mis-selling is expected to occur in one in four financial products or services sold.

Dangle the carrot

Some common strategies used by mis-selling agents to attract gullible investors are:

• Guaranteed returns
• Premium discounts
• Last chance to buy the product
• Presenting distorted data to claim superior product performance
• Emotional exploitation concerning family, children, etc.

Unfortunately, there is not much you can do to prevent mis-selling. This is because unscrupulous or desperate sellers rarely communicate complete lies to investors; instead, they use a clever combination of truth, half-truth, and lies. Mis-selling is notoriously difficult to describe and identify.

Even if neither the customer nor the seller understands the merchandise, some people buy to please a friend, neighbor or relative. Ego would be another factor. The customer’s ego prevents him from admitting that he does not understand the product. He convinces himself that if a big company sells him, it must be good because the Securities and Exchange Board of India (Sebi) or the Insurance Regulatory and Development Authority of India (Irdai) have approved him. Finally, most important transactions are made without the advice of a professional because buyers do not know who to contact.

How to avoid bad products

Here are five easy ways for investors to avoid falling into the trap of overselling:

1. Avoid impulse buying: A hasty decision is often a waste. Even if the product is available for a limited time or the agent claims so, instead of jumping into purchasing the product, it is advisable to do proper due diligence first. It is important to know various product parameters such as product suitability, costs, benefits, alternative products, etc.

2. Don’t be greedy: When greed takes over rational thinking, it’s easy to slip up. Many people put their money into unknown financial products without even knowing what they are investing, overwhelmed by the lure of a large return. You should never invest in avenues that promise unbeatable returns.

3. After every rise, a fall is inevitable: financial products are creatures of circumstance. Each financial product is affected by different parameters such as volatility, market sentiment, etc. Superior performance cannot be guaranteed. It is not advisable to be a sheep in the hands of the agent. Rational decision-making coupled with adequate due diligence is vital armor in this world of uncertainty.

4. Ignorance is not bliss: new products are constantly being launched on the market. One of the main causes of mis-selling is investors’ lack of knowledge about financial assets. The lack of transparency is another cause. If one lacks financial literacy, one can learn to understand the product or seek advice from a financial advisor.

5. If you decide to inquire about the product, make a checklist: You will need to know the risk and return policies of the product. You can check the following details for any product:

• If a return is guaranteed, make sure you have it in writing.
• What are the costs?
• Does the product have regulatory approval?
• Is there a block time, and what are your choices for getting out?
• Don’t trust forecasts.
• Are returns guaranteed or subject to market risk?
• If there is a complicated return, find out how it works.

Look beyond the sales pitch

A howl betrays the wolf. Likewise, an aggressive pitch reveals the sales agent’s true intentions. The agent or representative of a financial services provider offers a product aggressively, usually based on the commission or fee they receive. Accordingly, it is better not to get carried away by what he says. You must first determine your investment needs before selecting a product.

Another thing to remember is that even if the agent is a friend of the family, ask them questions. Agents often mistakenly sell goods such as life insurance as investments. Remember that insurance is a risk mitigation tool.

By being more vigilant and cautious, you can reduce the risk of mis-selling. Make sure you don’t buy anything you don’t need. Methods to prevent mis-selling must be developed over time. An investor should be aware of their behavioral biases and be willing to act as rationally as possible. Risk tolerance levels should be clearly defined and used to guide investment decisions. Clearly define your goals and prioritize them in terms of importance before making any investments. The investor must calculate the return required for each defined objective and purchase the appropriate assets accordingly. This method of creating sub-portfolios for each goal is known as goal-based investing and will, to a large extent, guide investors’ investment decisions and prevent them from falling into the traps of overselling. . Investors can also consult and get help from a reliable financial advisor for a well-guided investment approach.

The author is the CEO of Tavaga Advisory Services

(DISCLAIMER: The views expressed are those of the author and Outlook Money does not necessarily endorse them. Outlook Money shall not be liable for any damages caused to any person/organization directly or indirectly.)