Friday, May 9, 2014

BP Holding Tax Management: Beware of banks selling non-banking products

Top management of banks are pressuring their employees to sell insurance, stocks and mutual funds by hook or by crook. No wonder, departing deputy governor of RBI has suggested banning banks from selling third-party products

From the point of view of retail savers, banks are a place where you park your money and get facilities to withdraw, issue cheques and also borrow. But what happens when a bank employee “advises” you to move in and out of stocks, buy a particular insurance product or buy or sell mutual funds? The result is rampant mis-selling, losses and large number of baffled savers.

Here is an email we just got from an Axis Bank employee. “As you are well aware of the practices followed by banks to sell or mis-sell investments products I need not elaborate them. But believe me the pressure, which is applied by the bank’s management throughout the year for selling these products can only be equated to madness. The management puts so much pressure as if without selling these investment products, the bank will not be able to generate any revenues. Moreover, the high percentage of revenues shared by insurance companies during the first year of sales is a major attraction for banks. Almost all banks organise contests within its staff for maximum selling of insurance products, and the rewards include all-paid foreign trips. All expenses, of course, are borne by the insurance companies. In spite of Cobrapost operation, banks have again started these old practices,” said the employee, who does not want to be named.

This mis-selling is not limited only to selling insurance or mutual funds. Some of the banks, which offer broking services, are found many times to misguide its own customers. Take for example, this investor who has a trading account with Axis Direct. He received a call from an Axis Direct executive sometime in February, asking him to sell his Larsen and Toubro (L&T) shares at Rs981. Totally wrong call, leading to huge loss of profit for this investor, as L&T made hit 52-week high at Rs1,387 on 23 April 2014.

Explaining how this happened, the investor told Moneylife, “On 14th February 2014, I received a call from an Axis Direct executive who said, ‘it is a good time to book profits with L&T as there is no positive outlook on the stock and it has max'ed up and the stock cannot go more than the said level and so book profits immediately.’ I sold 120 L&T shares at the price of Rs981. After this point I kept a watch on the stock and I'd have accepted some Rs20 to Rs50 rise/fall in price, I would not have complained. But here the problem is different. The stock kept on rising and its above Rs1,350 which actually converts to a loss of profit of more than Rs44,000.” When he complained, Axis Direct responded by saying, “the stock decision is the sole discretion of the investor!”

The investor said, “Now I am pissed off and have decided to never take the calls from Axis Direct and might abuse them if they come up with advice. Also I believe that this call was made by someone who was low on his monthly targets and I became the victim.”

There are two hard lessons from these examples: 1. Never trust your “banker” to sell you any non-banking product or a third-party product in your interest. 2. Never take buying and selling advice from an employee who has no stake in your profits and losses. Moneylife tells investor not to trade on “hot stock tips” and make investment decision after doing indepth research and analysis. Moneylife Foundation organised free seminar; “Learn to be Safe & Smart with Your Money" on the basics you need to know for your own financial life. Newly launched Moneylife Smart Savers Network provides a complete guide on personal finance.

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