Last week I was reading an article about how Rahul Dravid was cheated by a Bangalore based firm Vikram Investments of Rs.4 cr. Though there were reports of many other celebrities being duped, Dravid has been the first to lodge a complaint. Similarly it was reported that badminton star Sania Nehwal was cheated of Rs.75 lakhs by the same firm. Now these are big celebrities earning hefty sums of money. I believe with their portfolio size they should be employing seasoned investment advisors or managers managing their money. How such professional people advice investment in chit funds is beyond my understanding. It may either be pure ignorance or simply the greed to earn a higher commission. Whatever it is, it is very bad professional ethics.
There is a direct correlation between risk/return & commission earned by the advisor or agent for various investment products. The higher the risk the higher the commission doled out & the higher the risk the higher the expected return. For example tax free bonds, government bonds, corporate bonds, would have fixed returns & low commission in comparison to debt funds & thereafter equity funds which would have the potential to generate higher returns also. Illegal chit funds & Ponzi schemes assure you of 30-40% returns & in turn also dole out hefty commission to agents. Life Insurance products are again a different ball-game with high commission & lower returns but I would not consider insurance as an investment.
Investment advice can either be commission based or fee based. The difference is commission is largely hidden in the product cost & is indirectly borne by the investor, a lot of times without his knowledge (he thinks he is getting free advice) whereas fees is paid by the investor to the advisor directly for his services. Unfortunately in India people do not want to pay a fee to a good investment advisor & instead prefer to invest in commission based products or simply low yielding bank fixed deposits. The advisor unethically would always promote products with a higher commission rather than a product which is most suited to the investor & capable of generating higher returns. Miss-selling is rampant in India & the situation will never change unless the mindset of the investor changes. Fee based advisory is the only way in which you can sync the interest & returns of the investor with that of the advisor.
As we can see above taking investment advice from the wrong people is a blunder. For example sportspersons keeps the best advisors and coaches for her game. Shouldn’t they do the same thing for their hard earned money?
We have seen several prominent celebrities being association with various chit funds/Ponzi schemes or some shady investment company. At least this is one avenue where you should not follow what the celebrities do or endorse. Willingly or unwillingly, even they can go wrong. The above example only proves that nothing in life comes free, especially investment advice, take it from the right person & pay for it. The higher returns you earn on your portfolio will definitely outweigh the price you pay for it.
Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata. He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’