Have you ever been asked to purchase an insurance product when you visited a bank branch for opening a fixed deposit? Most of us would answer this question in the affirmative. Why would this happen? Why would a bank official ask you to purchase an insurance product when you had gone to open a fixed deposit? The narrative would typically be like this. This insurance plan offers better returns (sometimes he keyword Guaranteed is also thrown in), provides insurance and tax-benefits too. How can a fixed deposit stand any chance against such brilliant product? When a financial product seems too good, it is too good to be true. And yes, such insurance product sales have caused a lot of financial and mental agony to a number of bank customers.
You had gone to your trusted bank of many years for opening a fixed deposit. Then why would the bank official push you a toxic insurance product? The explanation is quite simple. Banks earn more by selling you an insurance product (than a fixed deposit). In this post, I will list out reasons why you should never go to banks for seeking financial advice. In fact, I feel banks are the worst places to seek financial advice. Let’s consider these reasons.
Lack of Adequate Training or Expertise
Do you go to a highly qualified engineer for a medical prescription? No, you don’t. You go to a doctor. Even among doctors, do you go to a dentist or dermatologist for a heart surgery? No, you don’t. You go to a heart surgeon or a cardiologist.
It is not that the engineer, dentist or dermatologist are not smart. Of course, they are. However, they have not been trained to perform a heart surgery. And that’s the case with bank employees too. They are smart. It is just that they have not been trained to offer quality financial advice. It is quite possible that they have been trained well. However, the little interaction I have had with them in bank branches, I have found them woefully short.
I understand financial advice is not as complex as heart surgery but it still requires certain level of expertise. And I feel most bank officials have not been able to develop that expertise.
Financial advice should depend upon your goals (and not advisor’s)
Financial advice should be offered in the following manner. You have a goal or investment requirement. You are advised a product that helps you meet your goal or investment requirement. At bank branches, it works in the opposite manner. Typically, banks sell only select financial products. And they will push what they can sell. Your investment requirements don’t matter much. They don’t care.
Steep targets can put a lot of pressure on bank employees
As I understand, the bank branch officials are given stiff sales targets too. Sitting in the bank branch, the bank official has limited outreach. So, in a way, they are forced to prey on anyone who walks through the door.
Disclosure: I am a SEBI Registered Investment Adviser. Hence, I may benefit by dissuading you from seeking financial advice at banks. Please appreciate this conflict of interest.
Rampant Mis-selling (Misaligned incentives)
This is better explained with examples.
- Classic case of mis-selling at SBI. Read the article How to shrink Rs 50,000 to Rs 248? from Mint to get the complete story. Even Allahabad High took exception at this case. The 64- year old must have gone to the bank (State Bank of India) for opening a plain vanilla fixed deposit. He returned with an insurance plan. His Rs 50,000 investment became Rs 248 in five years. Though the mis-selling was done by agent SBI Life, the complainant met the person at the bank branch. Though the agent represented SBI Life, most times you wouldn’t be able to distinguish who you are talking to. Almost every time I visit ICICI Bank branch, I am asked to purchase an insurance product. What is this fascination with insurance products? Fat Commissions. Banks get commissions from insurance companies.
- One of my friends went to open PPF account with a PSU bank but was asked to purchase a traditional insurance plan.
- In another instance, the bank officials resorted to selling two year premium paying plans (and collected second year premium in advance) instead of a single premium plan. Single premium plan was cheaper. But the two year plan earned greater commission for the bank. If the customer had to pay the entire premium at one go, he should have been offered a single premium plan since it was cheaper. But then the bank would have earned lesser commission. So, the bank officials never told the customers about the single premium plan.
- I recently visited a HDFC Bank branch in Mumbai. A young couple approached a bank official with a request to invest in mutual funds. The bank official asked them to take a seat. Then he asked his neighbor, “Inko mutual funds mein invest karna hai? HDFC Small and Midcap Fund de de kya?” The couple was not asked any questions about their investment horizon, goals or risk profile. Mutual Fund recommendations straight away. Is this how financial advice is offered?
- SEBI noted some of the banks get more than 50% of their Mutual Fund Commission from a single fund house. This means banks are pushing products of a particular fund house. In most cases, I am sure the fund house will happen to be the bank’s group subsidiary. A bank can sell schemes from all fund houses. But somehow, they find schemes of a particular fund house so much better. Sounds surprising, doesn’t it?
You don’t have to believe what I have mentioned in this post. You can experience it yourself. You just need to visit the nearest bank branch and say that you want to open a fixed deposit.
I have nothing against SBI, ICICI or HDFC Bank. In fact, I believe these are three of the finest banks that we have in our country. I have been a customer of ICICI Bank for over 10 years and am extremely satisfied with the core banking services. I have my savings account, fixed deposits and PPF account with ICICI Bank. However, that does not mean ICICI Bank branches (or the retail bank officials) are equipped to offer quality financial advice.
And the cost is higher too
Banks will get you invested in Regular plan of mutual funds. You can save a lot of money by investing in direct plans of mutual fund schemes. Even with the insurance plans you purchase at banks, you can save a lot of money by purchasing directly from the insurance company. However, the focus of this post is not the cost but that you are not being sold a financial product based on your needs.
RBI, SEBI and IRDA, the respective banking, markets and insurance regulators are aware of the problems and have taken steps to address the issue. However, I am not sure if their actions or warnings have changed anything significantly.
What should you do?
Do not go to banks for any financial advice. Sometimes, you might be offered investment advice when you visit a bank branch. Do listen to their advice. Don’t act on it immediately. Go back and do research on the product. Purchase the product only if the product is a fit with your portfolio and financial goals. Do not give into the sales pitch.
Banks are good for core banking services and that’s what you should do with them. Don’t rely on any investment or financial advice offered at the banks.
Alternatively, talk to a fee-only financial planner or a SEBI registered Investment Adviser. These advisers do not accept commission from any AMC or insurance company. Hence, they have no incentive to recommend one product over another. Thus, your interests are foremost.
Disclosure: I am a SEBI Registered Investment Adviser. Hence, I may benefit by dissuading you from seeking financial advice at banks. Please appreciate this conflict of interest.
