Buying Ornamental Financial Products Out Of Obligation Can Be Disastrous

There may be various apprehensions. Why do you become a martyr? The word “martyr” may slightly pinch you! Obligatory products mostly don’t quench your thirst for financial freedom. It’s your choice, whether or not you’ll keep away from buying obligatory financial products or services from someone.

Obligatory financial products are traditionally commission based. There may be no visible upfront charges but there are hidden costs, which’s inescapable. The martyr doesn’t have knowledge about amount of commission payout. As you’re ignorant, you feel obligated to buy irrationally. When some advice is offered for “free”, you have to indirectly pay more and even the financial products become ornamental or disastrous.

“Nothing is more costly than something given free of charge.” – Japanese Saying.

We come across prospects/clients, who have financial plan and they may buy financial products by ignoring Financial Planning out of obligation.

They’re fulfilling salesperson’s expectation and not their personal requirements/expectations. It’s their illusion as it resembles an oasis in the desert. On comprehending, it becomes too costly and can hardly offset the financial loss.

Who is to blame? You being a subject, entire responsibilities are yours. You jump to solution out of obligation without understanding your exact requirements. While buying any complex financial product out of obligation/sales pitch, you don’t have answers to why you need, when you need, what you need& how much you need. You’re hypnotized by salesperson. But in short, product suitability is the ultimate diagnosis.

A salesperson’s objective is to be benefitted by selling financial products only to their “customers”. While an Adviser’s objective is to be benefited by benefiting his “clients”.  An Advisor is regulated by SEBI Registered Investment Advisor; where as a distributor/sales person is not subject to regulatory supervision. An Advisor is client centric because of which he’ll analyze a set of parameters before giving any advice.

At the time you buy financial products out of obligation, you can see one side of a coin only. You ignore invisibles. You’re biased and you may be suspicious about the benefits of financial products. Hardly have you known about the merits & demerits, i.e. you have incomplete information. You’re dependent on the salesperson and reluctant too. This is because you are obliged to buy the same and product analysis becomes secondary concern. A salesperson may not consider your uniqueness, like:

  1. Your risk profile & risk taking ability;
  2. Your investment time horizon;
  3. Your investment objectives &
  4. Your priority and expectations etc.

I’m recalling a recent incident, where one of my clients mailed me that he’s approached by an Insurance Agent & he’s feeling somewhat obligated to buy a life insurance endowment policy out of sympathy. My client feels obliged on humanitarian ground and simultaneously his concern was about the product suitability. It indicated a complex behavior (humanitarian ground as well as product suitability).

My responsibility was to send him an unbiased illustration. I strongly advised not to buy the insurance product after thorough analysis. His needs were not associated with the benefits of the complex financial product. My client’s emotion overweighed his rationality.  It’s very difficult to manage other’s expectation unless you’re independent. An Advisor is unbiased and guides you professionally and impartially. But if you ignore his advice, hardly you can offset your financial scars.

Time and money both are limited. If you lose money, either you may not get time to offset or you may not get the required money to offset the loss.

A traditional life insurance may generate 5% to 6% rate of return (ROI), whereas if you invest prudently in equity & debt combination and if your investment time horizon is more than 5 years may generate much more than the Life Insurance Policy India. Moreover, you can hardly offset inflation. Still your emotions over weigh logic (rationality) .

During your earning/accumulation phase and during your distribution phase (retirement/start collecting from accumulated amount), you may be approached by salesperson/ agent/ broker/ bank relationship manager etc. They will try to push their products. Without analyzing your requirement, if you buy, hardly you can get rid of the bitter consequences.

To conclude, I’ll strongly recommend you to go for financial plan first, and then you follow your action plans with periodical reviews until you reach your aspirations. Your emotions are your great enemy unless you regulate them. You’re expected to face this situation multiple times in your life. Take your own decision, best suited to meet your own aspirations. It’s your choice how you live your life.