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Simple Communication and Complex Financial Products

Mukesh Dedhia, CFP, IndiaBy Mukesh Dedhia, CFP

“Let’s uncomplicate!” is the slogan of one of the health insurance products in India and I find great sense in its application for all aspects of life. We are fortunate that God has given humans complex minds to think and that is what makes us superior to animals. But, at times, we overuse this trait and cause problems for others. If you take a step backwards and broaden your perspective, you’ll have a Voila moment! When you find simple solutions to perceived complicated things, your life will become much easier.

Simple Communication

Last week, I came across a client who was approached by another financial advisor to sell him some “investment solutions”. The “solutions” this adviser was recommending would only have caused more problems, though. Most of my clients, even when working with other advisers, take my opinion and act on it. This client handed me the documents associated with the investment solution and asked for my opinion. The product details were:

  • Invest Rs. 10,000 every month for 7.5 years and at the end of 15 years, the client receives Rs. 92 lacs.

The advisor told my client that the amount that should be invested, out of Rs. 10, 000 p.m., could be calculated using complicated software that he developed and that the product is a capital guaranteed one. On doing the math, I realized that this so-called advisor was promising a return of almost 22% plus a capital guarantee. After discovering this, I was curious to know the ins-and-outs of the product. On reading the fine print, I found the phrase “value averaging” written in small font at the bottom. Also, I found that the minimum investment could be Rs. 1000 p.m. but only Rs.10, 000 p.m. is accepted as the minimum.

In India, the mutual fund industry introduced the value averaging concept a few years ago, but it’s not very popular. When I saw the minimum of Rs. 1000, it was clear that the investment product was through some mutual fund.

I was amazed at this advisor. Why did he turn a simple mutual fund product into a complicated solution and pitch it to his client? His philosophy must be, “If you can’t convince them, confuse them.” Unfortunately, this way of selling, at least in the financial advisory business, will not help you build long term relationships and you’ll risk losing clients in the process.

I explained the product to the client in simple terms and even though I did not generate any revenue in that meeting, I am confident that the client will be mine in the long term. Due to the dynamic nature of the financial services industry, products can be quite complicated, but the way advisers explain products to clients should always be simple. Financial advisers who value simplicity speak to clients in a language they understand. They convince them whether the product suits them or not and they answer the client’s questions.

Complex Financial Products 

At the cost of simplicity, advisors should not avoid complicated products such as structured products. We should take the time and effort to understand products well enough to explain them to clients in a simple manner. Structured products are actually sensible for HNI clients, who have become wealthy accumulating money via equity/equity mutual fund investments. Beyond a point, these people shouldn’t continue investing in equity mutual funds systematically. Instead, they should book the profits and safeguard their money.

A good example of a complex product is a SIP. Most urban investors have a solid understanding of SIPs, but if you ask any Indian financial advisor, who has been in the business for more than two decades, how easy it is to explain a SIP to a client, they would express how much effort it takes to simplify this product.

A simple product can quickly become complicated if an advisor doesn’t communicate properly. No product is a complete solution and there are caveats with everything. Clients need to have a reasonable understanding of this concept and accept the risk that comes with investments. If financial advisers ensure risk management, then getting their clients to have realistic return expectations is really simple.

It is our job, as advisors, to continuously improve our skills to understand complicated financial products and simplify the information for our clients. Only then will we be doing utter justice to our profession.

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