“Derrick,” one of my closest friends, spent 40 years working 50-60 hours per week. He earned a good living - as much as $1 million per year in the last several years. He was always humble. He was grateful for his success. He showed it by being generous.
But over the past six years-unbeknownst to me-Derrick's wealth disappeared. It didn't happen in one fell swoop. His multimillion-dollar estate was depleted $100,000 at a time. It was, in my view, a form of robbery. And it's a form a thievery that is committed in broad daylight every day in every country.
It was a very sad day for both of us when I had to “lend” Derrick $150,000 so he could hold on to the house he'd once owned debt-free. This was the same house his children were born in. The same house in which he and his wife so often entertained us. Today, at nearly 50, Derrick is working harder than ever just to keep up with the bills.
Introducing the Wealth Stealers
What happened to Derrick happens to millions of people every year. After a lifetime of hard work and saving, you have accumulated a significant amount of wealth. It's now time to think about retirement. You wonder if the money you have saved will be enough to pay for all your expenses.
You are not a financial expert, so you look around for help. Enter “the Wealth Stealers.”
The Wealth Stealers are all around you. They are good-looking, well-educated people in suits. They hold professional titles and graduate school degrees. They speak kindly, but they have an agenda.
Their agenda is to quietly siphon as much of your wealth as they legally can. And they are frightfully good at it. When the Wealth Stealers work together, they can strip you of your wealth as neatly as a piranha can tear flesh from a human body.
They will steal from anyone and everyone, but they target older people-people in their 60s, 70s, and 80s. They prefer seniors for two obvious reasons:
Older people have more wealth.
Older people are more vulnerable to attack.
This will be the first of a series of investigative essays I'll be writing in the Wealth Builders Club called “The Wealth Stealers.” My goal is to expose what I believe are the biggest legal scams in the world, to identify the major players, to demonstrate how older people are vulnerable, and to give you an armour-plated financial plan to protect you from attack.
Today I'm going to tell you about the first biggest threat. I'll take you through a close look at it and show you how it operates. And finally, in subsequent months I'll be working with our research team to develop this “armour-plated” protection plan so you can put these worries behind you.
I don't think it would be fair to publish this series on Wealth Stealers without mentioning the often-dubious industry to which The Palm Beach Letter and the Wealth Builders Club belong: independent publishers of investment advice.
(I say “independent” to distinguish these from the publications by banks and brokerages whose recommendations are generally determined by corporate policy.)
To make this conversation simpler, I'm going to divide the industry into three groups: financial newspapers and magazines, financial newsletters, and tout sheets.
First, I'll just define each one so we're on the same page. These include the big newspapers such as The Wall Street Journal, The Economic Times, the Financial Times of London, etc., and national magazines such as Forbes, Personal Finance, Money, etc.
Financial newsletters: There are more than 1,000 of them. Among the biggest and best-known are Stansberry's Investment Advisory, Personal Finance, Retirement Millionaire, and the Oxford Club Communique. Here in India you have Equitymaster.com, and of course my own investment newsletter The Palm Beach Letter.
Tout sheets: These, too, are numerous. But their names vary. That's because tout sheets are nothing more than promotional schemes disguised as newsletters. Stock “hucksters” shamelessly promote, or tout, a given stock. The intent is to get you to invest your money in that stock, often without researching any of the stock's credentials. Tout sheets can be dangerous to the unknowing, naive investor. Keep reading here for an explanation of how the tout sheet system works. In India, several money-centric websites with chat forums are used as possible mediums for executing such devious plans.
The Independent Argument
Before we dive into the three types of investment advice publishers, I want to take a moment to talk about “independent” advice.
In the old days, there were distinct differences between newspapers and magazines on the one hand, and newsletters on the other. Newspapers and magazines made their money mostly through advertising, whereas independent newsletters made their money selling subscriptions. This gave newsletters an effective argument: “We are the only truly independent investment publications, because we aren't influenced by advertisers.”
As time went on, this distinction blurred. Newsletters began to make advertising deals with coin brokers, insurance brokers, and others. Meanwhile, newspapers and magazines began publishing newsletters.
Genuine “independence” grew muddled.
Independence, while a necessary qualification, is not sufficient. The most important criteria for me is the education that the newsletter provides. Ask yourself, “does this teach me something useful about wealth, wealth building, or investing?”
The second most important criterion is the track record based against the publication's own criteria… How good is the performance versus its stated objectives?
Stock Tout Sheets
Now, let's get into the three types of investment advice publishers: newspapers/magazines, newsletters, and tout sheets.
I want to spend the most time discussing newspapers/magazines and newsletters. Therefore, let's deal with the tout sheets to get them out of the way.
Tout sheets are advertisements for public companies. They are generally small- cap companies looking to generate capital by pumping up their share prices.
If they looked like ads, I would not even mention them in this essay. But they look like independent newsletters. Professional copywriters write them in the style of independent newsletters. The intent is to take advantage of the credibility of independent newsletters. When successful, naive investors read them, they believe the information to be an objective analysis by an independent third party.
This sort of advertising is legal if the material disclosed is factual. Also, the organization must properly disclose that they are advertisements. But the very nature of the tout sheet business is problematic. That's because many, if not most, of these start-up companies eventually fail.
And this leads us to the main way tout sheets steal wealth: The advertisement works effectively and lures investors; the stock shoots up; insiders take profits; the stock price falls; the naive investors who still hold shares find themselves poorer.
It is possible to make money trading tout sheet recommendations. If you are quick to buy and sell, you can often make a profit before the stock drops. But this is a specialized kind of trading. I don't recommend it to Wealth Builders Club readers.
The best course of action is to ignore them.
How to Identify Tout Sheets
You can identify tout sheets easily. Somewhere within the publication you will see a box that explains that this is a “paid” advertisement. If it is legitimate, it will tell you who paid to promote it and how much it cost.
Among the disclosures you may see something like the following:
“From time to time, XYZ Newsletter may receive compensation from companies we write about.” “From time to time, XYZ Newsletter or its officers, directors, or staff may hold stock in some of the companies we write about.” “XYZ Newsletter receives fees from the companies we write about in our newsletter.”
But you don't need to study that information. The very fact that it is a paid- for advertisement should tell you all you need to know.
Newspapers and Magazines
Now we get to the real meat of this discussion: financial newspapers/magazines and financial newsletters. I'll start with the first group.
Financial newspapers and magazines provide much more than stock and bond recommendations. They provide price and value data, industry facts and figures, economic analysis, and financial planning advice.
For the most part, the larger financial media sources employ smart reporters and experienced columnists. These people are diligent and honest. If you are looking for financial news and market analysis, you'll find plenty to keep you happy. The Wall Street Journal and Forbes are two such examples.
Your caution about greed in acquiring newfound wealth was spot on and was exactly the warning I was sensing myself. Your laying out the reasons why wealth is good… and how it should be used for good was also poignant. Wealth Builders Club member M. P. But there is an inherent problem with these publications. And this problem makes it challenging to profit from their advice. You see, they publish advice from a variety of different experts.
And these experts have differing views on the markets. Plus, these publications often publish news that is irrelevant. They do this because they need to keep readers entertained.
I remember some months ago reading a headline on a popular financial website. It was something along the lines of “This is the last gasp for the bulls.” The article featured facts and statistics on why the market was about to tank.
A week or so later, the same financial website featured a different story. But this time the headline proclaimed something like, “We're only halfway through this bull market with plenty of gains to come!”
This reveals one way newspapers and magazines steal your wealth: They don't provide integrated investment advice. That's because they see their job as providing readers with loads of news and investment choices. But this leaves the average investor overwhelmed - and confused.
This causes them to make poor decisions. Specifically, they cherry-pick their investments without any well-planned strategy underpinning their choices. And cherry-picking usually results in horrible financial performance.
Keep in mind, I don't believe newspapers and magazines intend to steal your wealth. They simply present prime conditions for you to lose it on your own.
But there's another problem with newspapers and magazines…
Because of how they're organized, they cannot give their readers uniform and consistent advice on the bigger and more important issues. These issues are things such as position sizing, stop losses, and asset allocation.
It's not surprising that individual investors achieve returns that are below market averages.
There is one last problem I have with financial newspapers and magazines. But this one is harder to prove…
When it comes to their economic analysis and financial market commentary, they tend to publish the views of the banks and brokerages that fill their pages with advertisements.
Don't misunderstand. I'm not suggesting banks tell the publications what to print. I'm sure the writers believe themselves to be independent. But a quick study of their articles on trends reveals that their views track market sentiment.
They are almost always optimistic about investments until about a week after the market crashes. Then they write articles about how “no one could have predicted” the crash. They conveniently ignore the fact that many independent newsletters did exactly that.
They also tend to be late getting back into a market after a downturn. From 2010- 2012, I was buying all the well-priced real estate I could find. Yet every major newspaper and magazine I read was printing stories about how toxic real estate was.
Not good advice.
How do investment newspapers and magazines steal your wealth? They confuse you, leave you on your own to integrate all their information, and tend to “run with the herd” with their advice. The outcome can be disastrous.
The last group is investment newsletters. This group includes The Palm Beach Letter and Equitymaster.com.
Investment newsletters are usually independent. As I said above, this has been a traditional argument in their favor. They are too small to attract the advertising of bankers, brokers, and insurance companies. So they are free to take positions contrary to conventional wisdom.
Many of them reflect the views and ideas of a single investment writer. Often, these writers are ex-brokers or journalists. They want to tell investors their version of the truth about making money in the markets.
If you want independent and contrarian views of the market, you are more likely to find it in newsletters. But this does not necessarily mean you will make more money following their advice.
How do you decide what to do with them?
Individual investors often look to the best performers from the previous year. But as analysts have often explained, investors who take this approach over any length of time do much, much worse than the market averages. (This is true for investors who pick money managers this way.)
If you followed the same strategy with newsletters that had top ratings over longer periods, you would do better. But one analysis I read stated that even those newsletters that performed well over a 10-year period were not necessarily top performers over the following 10 years.
The takeaway is that old regulatory caveat: Past performance is no guarantee of future performance. Buyers beware.
Another way newsletters “steal” your wealth is by persuading you to buy expensive products that might not be useful to you.
I'm talking about trading services that cost $1,000 (approx. Rs. 50,000) or more. I myself provide such a trading service, so I can't possibly mean that all expensive trading services are rip-offs. I don't believe that. In fact, many of them are quite good in that they have proven track records of earning above-market returns.
There is one problem though with trading services that you need to be aware of. It takes a certain degree of financial sophistication to understand how they work.
My first rule in investing is never invest in something you don't understand. You may have enough money to invest in a trading service, but if you don't understand how it works, the results can be bad.
This is something you should do regardless of what trading service you follow. Learn the basics. Understand the terminology. And most importantly, understand the risks.
The truth is that newsletters don't really “steal” your wealth the way brokers can. They don't hit you with charges you don't expect. Generally speaking, they sell advice and give you refunds. But that doesn't mean that you can't become poorer by buying good services.
When it comes to trading services there are two rules:
Find out how much cash you need to make good profits from them - after deducting the cost of the service.
If you find that you don't understand what they are doing, ask for a refund. Find another service that educates you before it gives you investment recommendations.
What Is the Individual Investor to Do?
What can we conclude from this?
First, as I mentioned above, forget tout sheets. Avoid them. But questions remain for newspapers, magazines, and newsletters…
Should you shun newspapers and magazines because their advice is inconsistent and overwhelming?
Should you shun newsletters because, as a group, they don't seem to be able to outperform the market?
Should you ignore them both, invest in the general market, and be happy with average returns?
My personal policy is to read newspapers and magazines to gather general news and information about the markets. But I ignore their specific investment advice because of the reasons I explained above.
Bottom line: Forget mainstream media for investment recommendations. Read their news. Let it inform your decisions. But don't take their specific picks.
As for newsletters, I approach them with a clear head. I recognize that what they are attempting - beating the market - is difficult. Rather than subscribing to one or another because it happens to have had a good track record, I do something else.
I take a longer view of their track records and consider whether their investment policies make sense to me. I follow Equitymaster.com because, as someone who has helped shape the publication in India, it emulates the lessons I teach about wealth building from my experience as a businessman.
But beyond that, you should be alert to some practices that raise big red flags. These practices will pretty much guarantee that a newsletter will not perform well in the long term.
If you want to find a solid newsletter, I suggest you avoid the following…
Red Flag Practices You Should Avoid
Dishing out recommendations like candy.
A publication that puts out 50-100 recommendations every year is a publication that can't do much more than confuse you. When it comes to financial advice, the responsible writer will limit his output to recommendations his reader can realistically follow.
Most individual investors can't handle more than one new recommendation per month. Aggressive investors might be able to buy twice that amount. But it makes no sense to subscribe to a newsletter that is giving you more than you can handle.
When it comes to specific investment advice, it's quality-not quantity-that counts.
Always shooting for the 10-baggers.
Newsletter publishers know there is a big market for investments that have the potential to skyrocket. The average investor likes nothing better than to tell his buddies how he made 1,000% on a particular pick. These people are not interested in a publication that recommends conservative, buy-and-hold investments-even though they're much more likely to do well in the long term.
There is nothing wrong with investing in speculative stocks. But you should only do so knowing there is a high probability that 90% of them will perform miserably. To me, speculative investing is gambling. The eager investor has a right to gamble. But he should not pretend that he is doing anything else. Limit your speculative investing to no more than 5% of your investible wealth.
Not tracking performance.
Many, if not most, investment newsletters do not publish accurate and comprehensive reviews of their performance. They seem to feel that making the recommendations is the extent of their responsibility. This is obviously not in the best interest of their subscribers.
Not making specific buy and sell recommendations.
If you are going to recommend a stock, you should tell your readers at what price they should buy it and at what point they should sell it. After all, making money in any investment is about getting in and out at the right price. In my opinion, newsletters that fail to do this are not doing their job.
Not providing asset allocations.
Studies show that the single most important factor in investing is asset allocation. Yet few newsletters provide actionable advice on this. That's because doing so is difficult. And it's far easier for newsletters to limit their advice to stocks picks. But as I've said many times, you can't get rich by investing only in stocks. You need a comprehensive approach that includes stocks, bonds, options, hard assets, real estate, and more.
Where to Go From Here
At this point, I want you to ask yourself a few questions. Think about the investment-service publications you read… which financial websites you visit… Ask yourself:
Why did you purchase your last five investments?
What “source” identified those investments for you?
How much of your own research did you put into those investments?
Were the investment recommendations part of a larger, integrated strategy, or have you just been cherry-picking?
Do you read “the fine lines” on investment recommendations that seem too good to be true?
Are the financial resources you read consistent in their advice?
Have you reviewed the track records of whatever publications you follow?
Are you following an asset allocation strategy? Remember, you cannot get wealthy from investing in stocks alone.
Think about your responses. Ask yourself if all the financial magazines, newsletters, and tout sheets are helping you or hurting you.
“Invest in this stock and double your money for sure in just 3 months.”
“Earn guaranteed 30% annual returns by investing in this scheme.”
We're always hearing such tall claims about the stock markets, and sometimes we are tempted to buy into these claims. In the years 2007 and 2008 especially, everyone was rushing to invest in stocks. Your local vegetable vendors and shop-owners all seemed to have tips on the next multi-bagger stocks.
It was a time of intense exuberance!
In such times, was there an advisor who cautioned you and kept you away from unhealthy investment ideas?
Or did you end up falling prey to such poor advice, which eroded your wealth?
There are many advisors out there who are what Mark Ford calls wealth stealers rather than wealth creators. And in this essay we will list for you ways in which you can ensure that the investment advice you receive is trustworthy.
These days, even banks can't be trusted for unbiased investment advice.The recent spate of news about banks mismanaging their customers' money is rather bone-chilling. Relationship Managers (RMs) at banks have often taken their clients for a ride… and investors are left feeling betrayed.
There seems to be grave compromises on ethics on the part of banks, and even morally on the part of RMs. Far from managing your relationship with old-fashioned care and dedication, keeping your interests at heart; some RMs appear to be working for themselves more than for their clients. is partly because of how salaries are structured today - fixed and variable pay. RMs make most of their compensation through incentives when their sales targets are met, and so do banks through commissions. An RM of a reputed international bank once candidly admitted that depending on how many ULIPs he sold, his bonus would be boosted.
It doesn't stop there - individual agents and distributors of financial products aren't any different. Although they call themselves “investment advisors” they may not always have a client's interests at heart, especially if they depend on commissions rather than a fee-based income. They may push financial products that are beneficial to them, rather than advising you based on your investment objectives, risk profile and long-term financial goals.
Remember, RMs at banks / agents / distributors may have their own way of selling - that only makes them richer - but it is up to you to assess the tall claims made by them so that you don't fall prey to fraudulent activities.
It is your hard-earned money and you must take complete responsibility to handle it. If you are still falling for random stock trading bets or investing in unsuitable avenues, then it can not only harm your finances, but also jeopardize the future of your loved ones.
In our asset allocation series we have already written to you about how to protect your financial situation from a crisis.
Here we give you a list of some dos and don'ts that you should follow in order to stay protected from unscrupulous RMs / agents / distributors / investment advisors…
Choose your investment advisor with due diligence
Deal only with a registered investment advisor
Carry out a thorough background check and analyse the track record and qualifications of your advisor
Read all the investment documents carefully
Read the features and benefits of the investment products, to assess whether they suit your risk profile and investment objectives / financial goals
Carry out at least some basic research and do a self-study
Ask questions to potential investment advisors which are relevant in context of your investment objective, risk profile, asset allocation, financial goals, taxation, etc.
Monitor your investments regularly to know where they stand and see whether they are meeting your objectives / financial goals
No matter how busy you are, take the time you need to carefully plan your investment / finances.
Don't put blind faith in your agent / distributor / relationship managers
Don't always go by big brands
Don't invest as per any advice given by companies that are not registered with appropriate regulatory bodies
Don't ever sign blank cheques / forms
Don't blindly believe anyone offering “guaranteed returns” (%) on market-linked products
Don't get drawn in by promises of making quick money
Don't invest money just because your relatives / friends have invested in schemes
Recently, after having dealt with many cases of misguidance from so-called investment advisors, the Securities and Exchange Board of India (SEBI) has introduced much-needed regulation vide the SEBI Investment Advisers Regulations, 2013. The regulation outlines requirements related to obtaining a certificate of registration, qualification, capital adequacy, period of validity of the certificate and other general obligations and responsibilities on the part of investment advisors.
However, here are some things you should consider while choosing a trustworthy investment advisor.
So how do you select a prudent, independent and an unbiased investment advisor?
Check for the following…
What is the attitude/ rationalisation of the advisor?
The attitude and the rationalisations of your investment advisor are reflected in the investment products he advises. If his primary objective is to get a bigger commission, he may push inappropriate products. After all, that will help him earn a handsome sum through commissions. You need to understand his attitude or philosophy. If you are uncertain in the beginning, meet with him multiple times before signing a cheque for your investments.
How qualified is the advisor?
SEBI Investment Advisers Regulations, 2013, has prescribed that an investment advisor should have professional qualifications or a postgraduate degree or postgraduate diploma (in the field of finance accountancy, business management, commerce, economics, capital market, banking, insurance or actuarial science from a university or an institution recognized by the central government or any state government or a recognised foreign university or institution or association) or be a graduate with at least five years of experience (in activities relating to advice in financial products or securities or fund or asset or portfolio management) and should hold relevant certifications necessary in discharge of service.
You need to judge how legitimate your adviser's knowledge is, and how he will use it to provide prudent investment advice to you, and educate you as an investor. Acting on the advice offered by an investment advisor who doesn't have the requisite knowledge, could spell disaster for your investment portfolio.
Does your advisor have the requisite infrastructure to provide value-added services?
Entering an investment is merely the starting point. Your investments need to be monitored and tracked on a regular basis. As a value-addition your investment, the advisor should ideally provide you with various tools and calculators for tracking your investments online. Moreover, he should continually advise you on your portfolio in accordance to the change in market conditions and your own financial goals.
Will you receive quality after-sales support?
As we noted above, entering into an investment relationship is just the starting point. You also need to judge whether your investment advisor provides prudent and reliable after-sales support. You may require support for things such as redemptions, transfer, adding a nominee, transmission or even change in your bank account mandate. It always makes sense to select an investment advisor who is easily accessible.
Does he have a good track record?
If your advisor can show you his track record, you would be able to gauge the quality of his advice. If possible, you should cross-verify the data provided by him with some of his clients as a reference check. This exercise may not only help you understand his performance track record, but also help you recognise whether he provides prompt and reliable after-sales service, or is he merely a bluff-master.
Is the advice backed by proper research, processes and systems?
With a plethora of investment avenues, the task of selecting a winning investment proposition can get rather complex, not only for you, but also for your investment advisor. Nevertheless, proper research and analysis is vital if you want to hold a winning portfolio. Find out if your investment advisor has access to any research, or does a self-analysis while rendering service. While many exhibit past performance sheets, it may not be appropriate to get lured by it, because past performance is not everything and it may or may not be sustained in the future. A holistic research-based or process-based study is much more important.
How does he do risk profiling?
SEBI Investment Advisers Regulations, 2013 has prescribed risk profiling of investors. Risk profiling is the sum total of your risk tolerance and risk appetite taking into account details such as your age, income, expenses, assets & liabilities, financial responsibilities you are shouldering, insurance, investment objectives, financial goals, nearness to financial goals; amongst a host of others. All these inputs are significant to receiving appropriate investment advice.
While investment opportunities and avenues abound, you should be extremely careful with your finances. Ask your advisor about the processes he adopts in risk profiling and the documentation he follows and get it double-checked.
Does he make relevant disclosures?
The capital market regulator has outlined a few disclosures to be made by investment advisors to clients. These are:
Disclose conflicts of interest as and when they arise.
Disclose all material information about the advisory body including its business, disciplinary history, the terms and conditions on which it offers advisory services, affiliations with other intermediaries and other such information as is necessary to take an informed decision on whether or not to avail services.
Disclose any consideration by way of remuneration or compensation or in any other form whatsoever, received or receivable in respect of the products or securities for which the investment advice is provided to the client.
Disclose his holding or position, if any, in the financial products or securities which are the subject matter of advice.
Disclose while rendering investment advice - all material facts relating to key features of the products or securities, particularly, performance track record.
The investment advisor should draw your attention as a client to the warnings, disclaimers in documents, advertising materials relating to an investment product which he is recommending to you.
Additionally, SEBI Investment Advisers Regulations, 2013 has made it mandatory that information about the client shall not be divulged, without taking prior permission of the clients. PersonalFN believes that while there are now enforced regulations for investment advisors, you must be careful and select your investment advisor wisely. After all, nobody will care about your finances the way you can, and nobody understands your own financial goals either.
Give your wealth building journey a boost by choosing an advisor who understands you, and will protect and improve your financial situation with his knowledge.
I was at the bank the other day, waiting for my turn to deposit some cash. In the meantime, a gentleman walked up to me and asked -
'Sir, are you looking to invest some money for appealing returns?'
For the sake of my curiosity as an avid investor, I replied - 'Yes'.
'Do you invest in equity?' he asked… and I, once again, replied in the affirmative.
'Great! Then I have the best investment plan for you.'
I was intrigued to know what he had to offer… and asked him to spare me a few minutes until I had deposited the cash. Luckily the queue moved quickly and I was done in minutes.
Sitting on the couch, I resumed my conversation with him…
'Sir, we have an ideal product where you would be killing two bird with one stone, meaning taking care of your investment and insurance needs. And the best part is, it is a short term plan; so you don't have to deploy funds for too long. All you have to do is invest Rs 1 lakh for 3 years, and after 10-15 years your money will have given excellent returns', he said.
I was mystified for a moment, and asked him how?
I didn't get a very satisfactory answer. All he could say was that the money will be invested in equities. He was unable to explain the investment strategy to back those tall claims of excellent returns… and nor were any incidental charges mentioned at all.
While I'm an avid investor, I endeavour to invest most of my money based on my own investment objectives and financial goals. He kept on making tall claims, but never bothered to ask me what my investment objectives were as an investor.
So, I decided to stand-up, politely say thank you and leave. I was looking at a more holistic approach for managing my money prudently.
One of our clients, Mr Sharma (name changed), told us this story when they came to PersonalFN for financial planning services.
Mr Sharma was wise enough not to fall into the trap of this relationship manager at the bank. But there are many out there who get swayed by the impressive sales pitches of smooth-talking insurance advisors / agents / relationship managers and fall prey, leaving disastrous implications on their financial wellbeing.
While insurance advisors / agents / relationship managers are making tall claims of providing excellent returns, many investors / policyholders don't always bother to read the devil in the fine print and as result are left feeling betrayed. This has made insurance advisors / agents / relationship managers richer (through the attractive commissions they earn), while investors / policyholders have been duped.
A very few relationship managers and insurance advisors / agents actually do a need-based analysis by asking valid questions to their prospective clients such as:
What are your investment objectives? How do you see your risk profile? Do you have any liabilities? Which are the financial goals you've envisaged? How many family members are dependent on you? Are you building a contingency fund? …and so on!
Most relationship managers and insurance advisors / agents intentionally or unintentionally end up cheating investors / policyholders of their hard-earned money. While such advisors' core aim may be to get more business and earn incentives, the client's faith is often based on the brand value of the company rather than on:
Understanding the attitude and rationalisation; Asking valid questions; Ascertaining the track record; Recognising the claim settlement history; and Understanding terms & conditions
It is vital to note that buying an insurance policy is more than signing on the dotted line and going by what your insurance advisor says.
Now, many of you may wonder how to select an insurance advisor when everyone out there is making tall claims.
Well, here are some points which may help you select an unbiased insurance advisor …
Certification from IRDA
This is the primary parameter for you to select an insurance advisor as it is a requisite qualification certified by the Insurance Regulatory and Development Authority of India (IRDA). According to the IRDA, an insurance advisor must undergo the prescribed training and pass the qualifying exam. So, before seeking advice from an insurance advisor ensure that he is certified by the IRDA.
Ability to offer advice
Your process of selecting an unbiased insurance advisor should not end with ensuring that that he/she is an IRDA certified insurance advisor. You ought to ascertain the quality of advice that can be offered. An incorrect and widely-held notion is that the insurance advisor's core responsibility is to aid in the paperwork i.e. filling the form and depositing insurance premiums. Here, nothing could be farther from the truth.
Your insurance advisor's main duty is to offer accurate and unbiased advice. Hence, you should find out what his educational qualifications are, and judge his attitude and rationalisation. If possible, do reference checks. Insurance decisions based on inaccurate advice can have adverse implications on one's entire investment portfolio.
Quality of service
One of the common complaints we've heard from policyholders is that their insurance advisor no longer services their needs. Remember, insurance is not a one-time activity; on the contrary it is a long-term commitment. It needs to be serviced routinely. It makes sense to be associated with an advisor for whom insurance is a core activity. Often individuals are known to turn into insurance advisors on a part-time basis with the intention of making some income on the side. Typically, such insurance advisors /agents are known to lose interest, discontinue their insurance business and in the process leave their clients in heave.
So, you ought to enquire how long the insurance advisor has been operating. Here too, try and conduct an assessment of his service standards by interacting with some of his existing clients. Prompt and competent service should be treated as pre-requisites while selecting an insurance advisor /agent.
Range of products
There is a plethora of insurance products available today. And in the insurance sphere, it is vital to recognise that one size doesn't fit all. Every individual has different needs and they undergo change over a period of time. The insurance advisor should be capable enough to understand these needs and offer suitable products based on a need -based analysis while also ascertaining one's human life value prudently.
Nowadays, it is not uncommon to find insurance advisors who offer a standard solution (often in the shape of high commission generating ULIPs and endowment plans) to every individual, irrespective of his or her needs. On a similar note, pure term plans despite being the most affordable form of life insurance and the best to indemnify risk to life, usually never feature on the insurance advisor's recommendation. The reason being, lower commissions on such products.
In a scenario where there is a wide range of insurance products available today, an insurance advisor should have thorough knowledge of insurance products offered by insurers. Moreover, the insurance advisor should be informed about the competitors' products, so as to provide unbiased and meaningful recommendations, regardless of how much he stands to gain by way of commissions.
Attitude and rationalisation
The attitude and the rationalisations of the insurance advisor also play a vital role. So, if he thinks of his objective of being richer, he may recommend inappropriate products not suiting your investment objectives or financial goals, but earning him a handsome sum through commissions.
Competence is the key
Do not hire someone as an insurance advisor simply because he or she is a friend or a relative. The decision to engage the services of an insurance advisor should be based on the facets discussed above and competence along with skill should always be the key. The advisor has a vital role to play and hiring one for the wrong reasons can prove to be costly over the long-term. Your emotions should play no role while you hire an insurance advisor.
Taking cognisance of the rampant mis-selling which has takes place, the IRDA has recently issued guidelines for appointment of insurance advisors. The guidelines have come into effect from April 1, 2015 and are expected to bring about a positive change in the way insurance policies are sold.
IRDA has specific some 'Do's' and 'Don'ts' for insurance advisors and here are the high impact ones…
An insurance advisor / agent must make the prospect aware of the information needed for insurance contract Make the prospect aware of the importance of disclosing all material information while buying insurance Ensure all relevant documents are available while filing the proposal form An insurance advisor / agent must disclose his commission, if asked Bring to notice of the insurer all facts that might affect the underwriting process Should explicitly recommend the insured to provide a nominee for the policy Provide assistance to policyholders for any matter involving the servicing of policy
Insurance advisor / agents should not provoke prospects for concealing material information Insurance advisor / agents should not use any multi-level marketing for soliciting and obtaining business Insurance advisors / agents need to refrain from intervening in insurance proposals introduced by other agents They are expected to refrain from offering different rates, advantages, terms and conditions other than those offered by the insurance company They should also not induce prospects to cancel new policies with an intent of getting new business
Moreover, insurance companies will now be held responsible for all acts and omissions of their insurance advisors. If the insurance advisor fails to observe the code of conduct prescribed by IRDA, the insurance company would be held responsible for that too. In any such case, the insurer will have to pay a penalty which may be as high as Rs 1 crore. Also, any person acting as an insurance advisor in contravention to the provisions of the Insurance Act would be liable to a penalty of up to Rs 10,000.
These new guidelines issued by the IRDA are in accordance with the provisions of a recently passed Insurance Bill.
We believe that these new guidelines may help curb mis-selling, as insurance companies will be held responsible now for non-compliance of insurance advisors.
Also, strong rules pertaining to code of conduct, appointment and disqualification of agents may provide policyholders more legal defence in case of mis-selling.
Since insurance companies have to pay fine for misdeeds of their insurance advisors, they would proactively discourage mis-selling.
Insurance advisors too are now expected to serve policyholders better with a penalty clause set for them in case if they contravene the Insurance Act.
Having said the above, if you are approached by an insurance advisor, act in a conscious and responsible manner so as to save yourself from a rude shock of mis-selling. After all it is your hard earned money and thus imperative for you to handle with care.
Mr Romit Behl (name changed) called PersonalFN's board line number one day, sounding worried. He had entered a real estate deal three years ago, and was looking to speak to someone who could help him out with some advice…
We informed him that although we don't offer active advice on real estate, we would be happy to meet him and help him with any possible advice he needed on his overall finances. And that's how Mr. Behl ended up at our office in South Mumbai.
Being in the financial planning domain for over 15 years now, we have come across many people who have managed to build considerable wealth through investments. Cautious decision-making, a disciplined investment approach and prudently avoiding investment disasters have been some of the common traits of those who made their money work for them.
But we have also been approached by many who could have done much better with their investments had they not fallen prey to biased investment advisors who willfully dispense misleading guidance and wrong advice. When you don't do enough research and take hurried decisions, you are constantly in search of material that will reinforce your decision. It's quite natural, in fact, this 'confirmation bias' often leads you to make what could have been avoidable mistakes, as it happened in the case of Mr Behl - an otherwise successful businessman who's facing a money crunch today.
How Mr Behl got into trouble?
Mr Behl is an established businessman who made a good deal of money through years of sheer hard work and commitment to his business. However, he was a lazy investor who used his savings to buy gold or invested surplus money in real estate. He dabbled in the share market too but wasn't really impressed with it.
The stock market crash of 2008 was horrifying and had made Mr Behl uncomfortable with equity. The news channels and their reporters were constantly shouting about stock markets hitting new lows day by day and investors losing their wealth in stock markets. This was enough to press the panic button in the minds of investors, including Mr Behl.
He was thinking about switching back to his favourite investment avenue, real estate, when he met Mr. Meghani (name changed). Mr Meghani was known for his shrewdness and vast experience in the field of real estate broking. One of Mr Behl's friends introduced him to Mr. Meghani as “the master of the real estate market in Mumbai”.
Mr. Meghani persuaded him to invest in a local builder's real estate project. The project was on the outskirts of Mumbai and had just begun. In 2009, Mr. Behl invested about Rs 1 crore in a 2BHK flat which he could sell off for around Rs 1.5 crore by the time building was ready for possession, which was supposed to be by the end of 2010.
He made a profit in a short amount of time but a considerable amount of it went in capital gains and in commissions to Mr. Meghani (Rs 30 to 50 lacs). Still, on a net basis, he made double digit returns which he was happy with at the time.
As he built confidence in Mr Meghani and started taking him seriously, Mr Behl invested in multiple under-construction projects and also in plots. He began rapidly moving in and out of real estate projects, not always stopping to do his due diligence… In this effort, he didn't realise that he lost a significant portion of his profits in settling his tax liabilities and paying commissions to Mr. Meghani. Mr. Meghani was charging him 2% to buy properties and a steep 3% on exits, claiming that it requires great efforts to sell property at a premium because he has the responsibility of not only getting a good deal but also helping clients make a profit…
In 2012, Mr Meghani brought “the best proposal ever” to Mr Behl - 2 floors (about 10,000 sq ft.) for a value of Rs 10 crore in a central Mumbai township project started by a “trusted” builder, of which the 1st phase was supposed to be ready by 2014.
Mr. Meghani called it a bargain deal and predicted that Mr Behl may earn as high as 300% returns on his investments in just 2 years' time. Mr Behl had never had a bad experience with Mr. Meghani before and the dream of earning 300% ROI was irresistible. He somehow managed to arrange for the money - getting personal loans, and borrowing from close relatives - and made the boldest deal of his life.
Unfortunately for him, the real estate market entered a dull phase immediately after; and inventory piled up in Mumbai and the suburban regions. The biggest investment of his life got stuck in a piece of land, which he was unable to liquidate.
Mr. Behl's concern grew with every passing day, the borrowed money weighing on his mind. The interest he was paying was a burden on his finances. And the worst part, Mr. Meghani still hasn't found a potential buyer for this property; forget about getting him the best deal. After waiting patiently for over a year; Mr Behl finally sought help from a neutral advisor, and approached us here at PersonalFN to figure out what he should do about losing his money and how he can get out of this debt trap.
The True Picture…
Mr. Meghani won the confidence of Mr Behl projecting himself as an honest and knowledgeable advisor, but it was just the market movement that made initial profits for Mr. Behl allowing Mr. Meghani to claim the credit.
Actually, advisors like Meghani are everywhere - they fool people in good times and leave them in the lurch when things fall apart. They are more interested in their commissions which they earn irrespective of whether the investors make high, low or no profits.
Do you know the reason why Mr Behl got 10,000 sq ft of property so cheap?
The builder was strapped and was denied any loan assistance from formal channels (such as banks and other financial lending institutions). The builder was paying a 2% commission to Mr Meghani for luring in “bakras” (scapegoats). Even after learning this, Mr. Behl couldn't do anything about it as he knew Meghani had strong political links, and Mr. Behl cared more about his business than he did this deal. The last thing he wanted was to spoil relations with him and invite troubles in his business as well.
So what is the remedy?
The story of Mr Behl could be an eye-opener for the people who carelessly make investment decisions, and later repent. It also highlights how some advisors manage to get rich by putting their own interests ahead of their clients' and don't really bother about their clients' financial well-being.
No asset class, including real estate, should ever be treated as a means of making a quick buck. You may achieve some initial success, but even one mistake could prove very costly. So, avoid speculating on price trends. And this is true with every asset class.
While buying property, apart from the usual thoughts on affordability and locality, don't forget to…
Check for all documents, certificates and sanctions from relevant authorities Analyse the builder's track record and if possible, his financial condition Understand the prospects of the under-construction building, when you are investing in under-construction property Check all the associated costs Check if the builder is recognised by housing finance companies Check if the project is approved by any bank... it may help in getting finances Visit the site and inspect the quality of construction Talk to other customers / potential customers Read the fine print of the advertising material well And more... whatever it takes to satisfy you that what you are doing is right.
Above all, don't depend solely on the advice of self-proclaimed experts. Rather, avoid such wealth stealers; anyone who can make a hole in your pocket and drain your wealth to fill their own coffers.
Unfortunately in the case of Mr. Behl, there was nothing to be done. Money was already paid. Construction was partially complete as the developer had run short of cash since many of the already constructed flats remained unsold due to a lull in the property market. Chances of recovery are not yet in sight.
Rs 10 crore is a big amount even for a wealthy person like Mr Behl; if he is unable to sell off his real estate inventory in the next few months he may face a money crunch that would hamper his other financial goals.
His son is graduating next year and is aiming to go abroad for his post-graduation from a reputed business school. His daughter, with dreams of becoming an engineer, is looking at joining a bachelor's program soon after she passes her inter-collegiate exams. He initially had thought of downsizing his business once these two goals are met, and hence took a bigger risk in the real estate deal in an attempt of accelerating returns.
And this turned out to be a mistake. Remember, the closer your financial goals, the safer the bets you must take.
At the Wealth Builders Club, we have two underlying rules. One, never ever lose money; the primary characteristic of this plan is safety. And two, grow at least a little bit richer every day; the second characteristic of this plan is its dependability.
PersonalFN chalked out a plan for Mr. Behl which…
Re-defined his financial goals Highlighted the importance of having contingency funds Realigned his portfolio mix giving him a more balanced asset allocation Drew up steps he should take to pay off his debt Provided him with a roadmap to create an alternative investment plan to re-build his wealth, assuming there is a possibility of his incurring some losses in the existing real estate deal
Mr. Behl is still unable to fully recover the money from the real estate project, but he has learned a valuable lesson and decided to keep wealth stealers like Mr. Meghani at arm's length.
What about you?
Our Common Sense Living reader, RSR, is ready to retire. He is still working past retirement age, is tired of his work, but is just not financially secure enough to let go of his job. He has one solid avenue that could take care of him for the rest of his life, though.
Many years ago he had bought a flat in the suburbs of Mumbai. Now he wants to sell the flat and move his life to Pune where his beloved daughter lives.
He believes life in Pune will be more peaceful. He is tired of the traffic and pollution and hassle of Bombay. He wants peace and family time, and he is close, but not there yet.
What's stopping him? He is worried about selling the flat.
Selling his flat will probably be the most important financial transaction of RSR's life and he is not sure he can do it right? He is nervous that he will not get the right price for the house, or not be able to sell it at all.
To get out of his state of undecided inaction, RSR approaches a real estate agent. An agent, he believes, is after all an expert. He should be able to maximize the value of his transaction, right? The agent is better informed about the housing market, has the right contacts, understands the psychology of the buyer, and since he is getting paid, his loyalty should lie with RSR, so he will push for the best possible price.
Like a lot of us, RSR has come to believe that getting an expert to do something that might seem difficult is the best way to go about things.
As a Mumbai-based real estate consultant said “You have to trust the expert. That's the way it is in all the fields. The jeweller values the jewels and the insurance agent values the car. Price is the equilibrium of demand and supply and the agent knows the demand and the supply in the market”.
Well, so we are inclined to believe. But is he right? Is the real estate agent really interested in maximising the value of RSR's house?
In answer to this question, economist Steven Levitt and journalist Stephen Dubner, say in their bestseller, Freakonomics (get link from Akshaya D), “It would be lovely to think so. But experts are human, and humans respond to incentives. How any given expert treats you, therefore, will depend on how that expert's incentives are set up.”
So let's say the agent is getting a 2% commission to sell your flat. If he believes he can sell the flat for Rs 20 lakh, he can get a Rs 40,000 commission. Perhaps with a little patience and persistence he could sell the flat for more, perhaps 21 lakh. But does he have enough incentive to do so?
If the flat is sold for Rs 21 lakh, the agent will gain only an extra Rs 2,000. The increase in commission is too little for the agent to really care about pushing for the best price.
His aim is to make the most profit for the least effort. This means that he will probably sell out to the first good offer that comes along so he can move on to his next client.
In fact, he will also go out of his way to convince RSR that this is the best possible offer he could receive, and concoct horror stories about bigger and better flats that are lying unsold in the neighbourhood because owners will not accept the right price.
When you hire an expert, yours and his incentives do not necessarily line up.
If your flat sells for an extra lakh, you make an extra Rs 98,000 but the agent makes only an extra Rs 2,000. And yet we expect him to act in our best interests. But we all know, inherently, that each one of us will act according to our own interests first - including the agent.
Interestingly, in the book the authors go on to examine how agents behave when they are selling their own flats. They found that when agents are selling flats that belong to them, they keep their house on the market for an extra ten days on average, and sell it for an extra $10,000 on a house that costs $300,000… something an agent would not do for you.
“So a big part of a real estate agent's job, it would seem, is to persuade the homeowner to sell for less than he would like, while at the same time letting potential buyers know that a house can be bought for less than its listing price,” say Dubner and Levitt.
That is the opposite of what you are hoping for when hiring an expert.
The truth is, in some cases you have to bring on an expert, you simply have no choice.
If you are in that position you need to keep these things in mind:
A real estate agent may not always get you the best price. You need to figure out the price you want and hold firm on it. Don't be swayed by horror stories of unsold houses - do your own due diligence.
The incentives of the real estate agents are not always aligned to that of the seller. But they are not trying to dupe you, they are just trying to do what's best for them, and you should be clear on what's best for you.
Make sure you are hiring someone with sound credentials, and trusted referrals. If you do this, it will take a whole load of stress off of your chest.
Have patience and fortitude. Don't get scared, and stress over missed opportunities. There is always a right time - and sometimes waiting is the right thing.
Finally, read Mark's essay on Making an Offer and Negotiating Your Final Price, which will help you figure out the right price for your property and what number you should choose to stand firm on.
Once upon a time, the Indian capital markets functioned on an open outcry system. Within that system, the skills of a broker - and his integrity - played a crucial role in the decision making of an investor.
It wasn't often that brokers offered the best buy and sell rates. Fraud and fund misappropriation were common. Matching a buy order to a sell wasn't automated, and nobody outside the inner circles had access to real-time price data.
India was a closed economy prior to 1991. In the absence of foreign institutional investors (FIIs), the Indian markets lacked depth. Many of the listed stocks were in the brokers' hands. Scammers on Dalal Street deceived gullible investors and artificially hiked stock prices. This widespread corruption eroded the once-respectable image of the broker fraternity.
Of course, not all brokers were corrupt. But the few ethical brokers who investors could trust achieved a special status in society.
Cut to the present system…
Investors now use screen-based order matching. Even the smallest retail investor has access to real-time price data. Buying shares has become easy and transparent. Today, stock market participants are strictly regulated, and there exists a crew of specialist advisors. And the position of stockbrokers has become modest while the competition has intensified.
Selecting the right brokerage house today requires new criteria. Of course, a few things remain unchanged in this business. For starters, the credibility of a broker is still the most important factor to consider. Then you need to determine what you expect from your broker. Making a list of requirements will make it easier to filter out unsuitable options.
Before selecting a broker, ask yourself:
What is my level of commitment to invest in stocks and other securities? How many years will I continue to invest in stocks? How frequently do I expect to transact? Do I have the time and expertise to make investment decisions?
Something else to keep in mind is transaction costs. Every time you buy or sell shares, you will pay the brokerage a fee. Frequent traders not only miss long-term opportunities; they also shell out more in fees to the brokerage and taxes to the government. Always remember your broker earns through commissions. It's in their interest to encourage you to trade often. So it will help to keep the following factors in mind:
Compare brokerage structures
Every trade has three parts: a buy or sell order is placed, the stock is debited or credited to your account, and the money is transferred. Most brokerage houses will help at all three levels. Banks often offer 3-in-1 accounts allowing you to connect your savings, trading, and demat accounts. Banks usually promote brokerage houses they have agreements with to offer you all the services on a single platform.
You may or may not opt for such a platform offered by the banks; however, it's preferable to open a trading account with a brokerage company that also offers a demat account. Transactions will be inconvenient otherwise.
There was a time when brokers extracted commissions as high as 3.5-4% per transaction. But competition has lowered commissions to about a tenth of what they used to be. Discount brokerages operate on wafer-thin margins and charge you a fixed fee per trade. That means the fee is the same (say Rs 20) if trade is worth Rs 10 thousand or Rs 10 million. This indirectly incentivises you to trade high-value and high-volume.
The wise know there are no free lunches. If you opt for a discount brokerage, you won't receive any of the personalised services such as welcome calls, dedicated relationship managers, trading tips, and so on. If you want these services, expect to pay a bit more - 0.25-0.60% of the transaction value.
Range of services provided
Some brokerages may also provide access to other financial services such as mutual funds, commodities, insurance, consumer loans, and fixed deposits. Investors who want to enjoy such services under a single umbrella should opt for a broker that offers a variety of products.
Be warned, though, they might charge a hefty maintenance fee for access to their bouquet of services. So check the premiums. And it's certainly worth asking if your broker is willing to offer a tailor-made product basket that suits your needs. It's smart to avoid paying for services you don't plan to use in the near future.
Reach and technological soundness
The presence and reach of the broker shouldn't be overlooked. A brokerage house might have great rates and services, but unless it has branches near your office or home, completing transaction-related formalities will be time consuming. Fortunately, technology is making this less relevant. Therefore, always check how technologically up-to-date the broking house is. Do they have an app? A broker that invests in technology is bridging a path to reach you faster. If their technology is good, you will be able to track your investments better.
Gauge the depth of guidance
Seamless transactions are one thing. Buying a quality stock is another. If you don't know what to buy, avail yourself to analysts and professional research services. That said, it is best to keep your broker and your financial advisor separate - by a Chinese wall. This discourages biases and empowers you to make sound investment decisions.
Seldom do brokers advise you to avoid intraday trading and provide you with unbiased and comprehensive research. If you find the exception to this rule, you may opt for their services. Some of these rare brokerage houses even go one step further and provide customised services based on your risk appetite and time horizon.
A final note of caution…
A broker will help facilitate your trade, but you are responsible for the success or failure of your investments. If you give any power of attorney to your broker, make sure it is limited only to execute a trade. Never permit your broker a freehand. Your broker should not be making buy and sell decisions for your portfolio. Always be sure you are in the driver's seat.
Lately I came across a Forbes article which insisted buying a car is the worst investment one could make. The article asserted that wealth builders always invest to multiply their treasure, not to destroy it. For most people, an automobile is the second most expensive asset after real estate. However, these investments are as different as north and south.
While you can be relatively sure that your investment in real estate will multiply over time, a car is a depreciating possession. Be it a Mercedes or a Maruti, your car will depreciate as soon as you drive it off the showroom and will never regain its value.
The other day I was sitting with my cousin, Gaurav, who runs a transport business. I shared the article with him to get his opinion.
Check out this Forbes article. It practically says not to buy cars…that they are the worst investment.
Haha! Cars aren't an investment…unless you run a transport business like me. They are expense and only expense.
True, but don't you think people spend a substantial part of their wealth on cars?
Yes, but that's why people create wealth…to indulge in luxury. However, they shouldn't get swindled when buying a car…which happens very often.
Ignorance mostly. And I don't blame people for it… Not many people buy cars frequently enough to know the automobile market inside out. They easily fall prey to inflated prices and the dealer's rosy words. They can get swindled in many ways, but the two most common mistakes are 1) not choosing the right car and 2) not choosing the right dealer.
Choose the Right Car Me:
Umm… So how do you choose the right car?
If you want to buy a car, first decide why and what you need it for. For example, will you need it for long distances or short. Opt for a diesel car if you are running 3000 km or more every month. Otherwise, get a petrol vehicle. Diesel cars cost more than petrol vehicles and require more maintenance.
Also be clear with your seating capacity requirements, and choose your segment wisely. Where do you aim to use your car - on long routes and highways, or in the city for domestic commutes? Go with a hatchback or sedan if you are an urban rider. Nothing better than an SUV for highways and rural areas.
One must know these things before buying. If not, it is easy to be lured by lush advertising and all he thinks is, 'This is the latest model with rich looks and premium features - I should get this.'
Know that when a company launches a new car, it does EVERYTHING to place it in your mind. It becomes their priority in sales. You see heavy advertising and promotions. The dealer showrooms flaunt it before visitors and convince them for a test drive of the 'latest innovation'. But you should know your need and budget, and make a choice according to that.
Of course, but many buyers don't realise this, especially first-time buyers.
Yes! In fact, if you are buying your first car, I would suggest you get a used car rather than new. For two reasons: First, I assume you won't be a great driver yet, so your car might end up with heavy scratches and dents - and nobody likes to see even a minor scratch on his new car. The resale value goes down. Moreover, nothing affects the life of a car as much as amateurish driving.
Second, a used car won't cost a fortune. You can buy a used hatchback for as low as 1.5-2 lakh.
I totally agree. When my father bought a used i10 Magna to teach me how to drive, we got it for 2 lakh. A year later, we sold it for 1.7 lakh. So we owned an i10 Magna for a year and paid only 30,000 bucks. I totally agree that buying a used car is a better idea.
It surely is. Why else would a player like Maruti enter the used car business?
Let's look at your own experience. I guess the first buyer would have paid around 4.5 lakh for the i10 Magna. After how many years did he sell it to you?
Around two and a half.
See! Now if we go by straight-line depreciation, his car's value came down 22% every year. Whereas with you, it depreciated 15%. That's very interesting. A new car depreciates tremendously - mainly because it loses its 'new' tag - so the initial buyer sees the biggest hit.
Therefore, it is wise to buy a used car. You can even buy a better car for the same price. For instance, if you have a budget for a new hatchback…you could get a used sedan for the same price. If you have a budget for a new sedan, you can definitely get a used SUV with that money instead. But, as they say…to each his own.
True that. If someone prefers a new car for whatever reason, should he go for the brands that have greater resale value?
Personally, I wouldn't advise anyone to think about resale value when buying a new car. It is true that the used car market prefers some brands over others. But mostly a car's resale value depends on its condition and the market price then.
A good thumb rule, though, is a car worth 500,000 today might be worth around 300,000 three years later if it's as good as new. If the condition is average, you can get around 250,000. If it's in poor condition but still running, maybe between 150,000 and 200,000.
If the car has the original paint and is free from scratches and dents…and it has no history of mechanical problems…your resale value will be good.
Choose the Right Dealer I was only seven when my father bought his first car. This was in 1998… When the internet was not-so-common, one couldn't learn about cars online as we can today.
My father visited several showrooms to get various opinions and price quotes. While some salesmen tried to convince him not to buy the car he wanted, some gave him inflated quotations with unnecessary add-ons. Then there were some who theoretically explained the pros and cons of the model.
It was obvious that he would choose the dealer who offered the best price and a genuine opinion…and who were transparent about the dealership add-ons…'Only a few of them would actually matter, most are needless expense,' he said.
And so my dad got his first car - the one he wanted - a brand new Tata Sumo. He also got a learning that he passed on to me several years later: It is important to choose the right dealer when purchasing a car. Because most dealers only care about the sale…not you.
Certainly, there are good dealers who are transparent throughout the buying process. Getting a new car is a long and hectic process involving loads of paper work, negotiation, financing, etc, and it is important to know what goes on in the dealer's mind.
Recently, I was chatting with Tanushree, a friend of mine who runs a renowned dealership in Indore. She gave me some info on how to negotiate and when to buy a car.
How can one get the best deal while buying a car?
After you have chosen the model, you can start market research. You can visit different dealers and get their quote. The one who offers you the best price, without any hidden cost, should be preferred. We are living in the Information Age. You can get info about cars online, read customer reviews, watch YouTube videos, check ex-showroom prices, etc. A good model bought at the right price is what I call the best deal.
How open are dealers to negotiation? What is the right way to negotiate?
Dealerships are always open to negotiation. You should always mention any good deals you're getting elsewhere. You get to negotiate with sales people most of the time. You'll probably hear them say, 'I will have to check with my manager.' This is because we cannot cut off the price beyond a specific limit. The head office provides a price list with monthly discounts, and going below the limit would be unethical.
So in which months can people expect the lowest list prices?
In India, most people believe in buying car on an auspicious day like Dhanteras, Diwali, or Dusshera. Therefore, companies roll out the best discounts in October and November. You can also get an impressive finance rate in this period.
Which brings me to an important point: Many customers complain online that despite being promised a low rate, they were charged a steep rate of interest a few months later.
There are all sorts of sellers in the world. Read the finance papers, and whenever offered a 'great' rate of interest, don't believe it right away. They might have increased the term of installments, or interest in the later stages.
You can seek finance from the dealer or the bank - wherever you find lower interest rate. If your credit history is good, don't hesitate to ask for the lowest interest rate because you might qualify for it. Normally, a car loan extends up to five years. But sometimes there are genuine offers that allow you to pay back in two-to-three years. Do keep a check on them.
Can one rely on online sources for car prices?
Online sources are reliable, yes. There is Car Dekho and Car Wale. For used cars, there is Maruti itself.
Any parting advice for our readers-cum-prospective car buyers?
Take your time and make your decision patiently. Test drives are free… YouTube is free… Research as much as you can. Wait for good deals; you won't regret it. If you are a new buyer, make sure to acquaint an experienced person for help.
It only requires a little smartness and awareness to park your dream car in the garage at a dream price.
Let me ask you something. What do you call a good lawyer who has gone bad?
What do you call 5,000 dead lawyers at the bottom of the ocean?
A good start.
Okay, I'll be serious now. Simply put, a good lawyer is someone who doesn't charge much.
That doesn't sound like a serious answer, but it is. What most people don't understand about lawyers is their primary business is billing you for all you're worth.
It may sound pretty cynical, but let me tell you a story…
One time, a friend of mine - a lawyer - took over his wife's divorce business for two weeks while she was traveling. (She was also a lawyer.)
He met with half a dozen of her clients. They all wanted to spend hours complaining about their husbands.
He listened politely for 10 or 20 minutes and then said, 'Let's cut to the chase. This is a 50/50 state. You're not going to get any more than 50% from him, even if you think he's a scumbag.'
And he felt proud. He had saved them wasting billion dollars.
But when his wife came back, she found irate messages from her clients waiting for her.
Her clients were upset because they weren't getting the whining time they wanted.
What they wanted was the therapeutic effect of having their husbands pay for legal sessions, in which the lawyer helped them imagine totally bankrupting their spouses, even though it wasn't a possibility.
Now, this was an honest lawyer. He wanted to help his wife's clients. But he realised honesty has no place in the legal profession. So he got out and became a businessman.
If you want to do business, you need legal documents. But you don't need to pay big bucks for 90% of what you hire lawyers to do. Much of the work commercial lawyers perform can be done (and often is done) by their legal secretaries.
There's little commercial work that requires a great deal of expertise. And when it does, most high-priced lawyers are no more competent than low-priced lawyers.
In fact, in my experience, the expensive lawyer will take longer to come to the wrong conclusion. I'd rather pay Rs 5,000 than Rs 25,000 for questionable advice.
And when it comes to lawyers who defend you from serious problems, like civil suits or even government or criminal lawsuits… I'll tell you what these lawyers do.
First, they tell you that you've been victimised by the system and that you shouldn't be punished.
Filled with hope, you agree to hire them.
Then, they spend lots of time reviewing your documents and talking to the other lawyers about your case.
Then they get back to you. Even though it's unfair, they say your predicament is bad. There's a good chance you'll be put in jail forever. Your only hope is to turn over your entire bank account to them.
Then, they review your documents again and talk more to the other lawyers - and bill you for everybody's time.
Before long, you're broke… Then they settle the case.
What you find out later is the settlement had already been agreed upon at the first meeting - while you still had plenty of money in your bank account.
I'm not saying all lawyers are bad. Shakespeare did first.
I have, truth be told, had a good experience with a lawyer in the past. In fact, I've had several. One is with my local real estate guy. He charges me approximately Rs 1,000 per hour and does everything quickly and efficiently.
He's honest. I'm happy with him.
The other is with the attorney who handles my movie-making business. She's a real expert, an amazing negotiator, and she takes care of me like I'm a member of her family. She gets the most complicated stuff done in no time at all. I can sign her invoices without even looking at them, because I know they'll always be reasonable.
So, if you're on the hunt for a good lawyer, I have a few recommendations.
Rule 1 Never hire a lawyer because someone told you 'he's the best in the business.' That means he's extremely expensive and knows a hundred ways to rack up his fees.
Unless you're a celebrity (in which case, helping you out will be a credit to him), there's a good chance the fancy lawyer will sell you down the river, while he's charging you huge fees.
Rule 2 Never hire a lawyer whose office is bigger and nicer than your home.
A lawyer's office is like a casino. The nicer it looks, the worse it is for you.
Someone's got to pay for that fancy furniture. That someone is you.
Rule 3 Control their time. Get them to give you a fixed price in advance. If you can't do that, get them to give you an estimate, and pressure them to keep to it.
I only interview lawyers who've been recommended by friends. And I won't hire them unless I like them, and feel like I'd want to hang out with them.
One final bit of advice most people don't know: you can negotiate a legal bill if you think it's too high.
Little guys don't do this, but big clients do. All the time.
Let me end here by simply saying lawyers are good for one thing…
They make used car salesmen look honest.
Rahul Dhillon was floored when he got the estimate from the Honda dealership. He had brought his City there for a free recall repair. And though Dinesh, Rahul's regular local mechanic, had serviced the car just days earlier, the Honda shop found a host of problems with it.
What Rahul found disturbing were the photographs accompanying the estimate. One depicted a set of worn-out, dirty spark plugs. The service manager told Rahul if he left the car with Honda, they could start on the repairs immediately. Rahul said, 'No, thanks. I'll call for a service appointment.'
But he never did. He brought the repair estimate to Dinesh, who couldn't help but chuckle when he saw the photos. 'Rahul, these are not your spark plugs. We just put in brand new ones. And the rest of the 'problems' with your car are likewise pure B.S.'
When Rahul called the dealership to tell them he was on to their scam, they blamed a computer error for the bogus photographs.
Rahul dodged a bullet. But many people aren't so lucky. Today's cars are incredibly complex. Diagnosing a problem often requires specialized equipment and expertise.
In essence, you have to depend on your mechanic to find out what's wrong with your car. Your best defense against auto repair fraud is having a trusted mechanic in your corner.
When my car's coolant leaked last month, I took it to the dealership initially. They took me by surprise when they quoted Rs 13,000 for repairing it. I went to an independent auto garage then, which was recommended by a friend, and they fixed it for Rs 4,000. I had saved nine thousand bucks - quite a lot if you ask me. I had heard that auto mechanics could make a fool out of you…and that day I experienced it myself. If you own any kind of vehicle, you must have a mechanic you can trust. - KK, 30
In today's installment of Wealth Stealers, we'll look at how to find one.
To get an insider's view of the auto repair business, I sat down with Dinesh.. He's the gentleman who helped Rahul avoid getting ripped off. I've been taking my cars to him for 20 years, and he's never done me wrong, either.
Inside the Repair Shop Wealth Stealers (WS): Were you surprised when you saw the laundry list of problems Rahul brought you from the Honda dealership?
Dinesh: Not at all. I see lists like that all the time. Particularly after someone gets a free recall repair.
WS: Have you been in the car repair business a long time?
D: I've been fixing cars for as long as I can remember. I was fixing them professionally in high school, and I just stayed in the industry. I'm a second-generation mechanic, so it's kind of in my blood. My entire family is a bunch of motorheads. It's what we do.
WS: Did you ever do time at a dealership?
D: Back in the Stone Age, when I started, all the best mechanics went to the dealerships. So that's what I did. Independent repair shops were considered to be secondary to the dealerships, but that's no longer true. All of us - dealerships and independent shops - now hire mechanics from the same pool. We run an ad and let the best guy win.
WS: Though you started with dealerships, you've worked at independent shops since then, right?
D: Right. At one time, I even owned a repair shop. We actually had that bell that went 'ding-ding' when you pulled in.
WS: Where do today's mechanics prefer to work?
D: It depends on the individual. But the really good guys seem to gravitate to the independent shops.
D: Mostly because there's less in the way of politics to deal with, and you can communicate directly with the owner. A lot of guys like that.
WS: How do the mechanics get paid at a dealership?
D: I don't want to generalize, but most of the big chains use a salary system. Sometimes salary plus a commission.
WS: The mechanics work on commission?!
D: Oh, yeah. Sometimes the service manager receives commission, too. So is the guy in the parts department. Pretty much everybody in the dealership, in fact. In most cases, about the only one who's not paid a commission is the guy who parks your car.
WS: Doesn't that result in a conflict of interest?
D: It can. Because the more work they do, the more money they make. Being on commission certainly gives them an incentive to pad the bill. And then, of course, there's the guy who's not dishonest, but he is hungry. He's got a family to feed, so maybe he's a little more aggressive in his tactics than someone who's on straight salary.
WS: Why do dealerships operate this way?
D: It's a good way to keep their people motivated, especially since there's usually not an owner on the premises keeping an eye on them.
WS: How do you pay your mechanics?
D: We pay all our people a salary. Most independent shops do that. Come hell or high water, they get paid the same thing every week. There's no reason for them to lie about the work they're doing. There's no advantage to padding the bill.
WS: Should our readers only use non-commission-based shops?
D: Look, I'm not saying everyone on commission is dishonest. I have friends in commission-based shops, and they wouldn't allow their people to steal. And I'd rather have a commission mechanic who's a good mechanic than a non-commission mechanic who's a bad mechanic.
WS: What about the diagnostic equipment? Some dealerships make a big deal about having equipment so specialized to their brand that you can't possibly get the same quality service anywhere else. Is that a trap?
D: Sometimes, it's the truth. Manufacturers often have proprietary information that they don't release immediately to the aftermarket. It may take an independent a while to get it, but that's okay. Because if you have a brand-new car, it doesn't make sense for you to go to an independent shop until your warranty expires.
But after your warranty expires, everything from routine maintenance on up will cost you more at the dealership. Finding a good independent shop could really lower your maintenance costs. It's one reason independent shops handle 70% of non-warranty repairs.
WS: Any other disadvantages to a dealership?
D: When you go to a dealership, you hand over your keys to the service manager. And since a dealership may have 30 techs, you never know who is working on your car.
But the independent shop owner knows his clients and their needs. Let's say I check your brakes. Based on the way you drive, I'll be able to tell you that they'll be good for a month…or another year.
WS: Let's get back to the diagnostic equipment question.
D: Look, it's impossible for a shop to have the diagnostic equipment for every system in every car. That stuff is expensive. It's one reason a lot of independents specialize in, say, German or Japanese cars. That way, they can limit the amount of diagnostic equipment they have to buy.
I have 10 different scanners in my shop to cover the cars I want to cover. But sometimes a customer has a car I'm not sure I can 'talk to.' I tell them I'll try, and we get to work on the diagnosis. If I fail, no charge. And I send them to the dealership.
WS: I saw an ad for something called Car Scanner that you plug into your car's connection port. It costs Rs 1,000.
D: DIY (Do-It-Yourself) scanners are as hokey as most everything else you see on late-night TV. There's no such thing as a magical computer that you can plug into any car to diagnose a problem. It doesn't work that way. The scanner will simply give you a trouble code. The trouble code will tell you there's a problem within a certain system. But the scanner can't tell the difference between a broken sensor and a cut wire.
The DIY scan narrows down the problem, but it does not diagnose it for you. Tests still have to be run on the system to find out exactly what's wrong with it. Only then can the problem be fixed.
WS: So, the DIY guy ultimately needs to see a professional.
WS: Which raises the question: What's the best way to find a good mechanic?
D: Thanks for that question. Because every expose on bad auto mechanics bashes what we do for a living. Yes, there are bad guys out there. But they never tell you how to find the good ones.
WS: So, how do you find the good guys?
D: Ask your friends and neighbors. Find out where they get their cars fixed. Ask them if they've been happy with the results. Ask them if they feel comfortable there. If they tell you they use so-and-so because they're the cheapest…that's not the shop I'd go to.
What you're looking for is a personal recommendation from someone who has developed a relationship with a good mechanic. It's not unlike finding the right doctor, dentist, or hairdresser. The trust factor is critical.
WS: What about online reviews?
D: Definitely worth checking out. But keep in mind that a couple of good reviews on social media are no guarantee, and one or two bad reviews doesn't mean a mechanic's a bad guy.
Referrals from people you know really are your best bet.
WS: Let's say I've got a couple of referrals from people I know. What's next?
D: The next step is to interview each prospective shop owner.
WS: What sort of questions should I ask?
D: First question is, 'How long have you been in this location?'
WS: Not, 'How long have you been in this business?'
D: No. And that's very important. I could be a mechanic with 40 years of experience, but with a one-year business. Not that a one-year business is necessarily bad. But a 20-year business is probably going to be there for many more years. Sadly, 75% of all new businesses fail within the first three years. (That's a fact. I didn't make it up.) So, with a one-year business, you might be a little wary of the guy's 'lifetime' warranty.
WS: What else should I look for?
D: Check out the shop. Is it clean and organized? Or is it grimy with stuff scattered all over the place? And what's the vibe? Is it chaotic? Are people yelling and screaming at each other? Or is everyone just fixing cars? The atmosphere of the facility will tell you a great deal about the quality of work being done there.
Ask about the warranty, too. How long is it? Does it cover parts and labour? Will it be honoured anywhere else besides that shop? Depending on the job, you should be given anywhere from a 90-day warranty to a lifetime warranty for parts and labor. The most common warranty is for one year or 12,000 km.
WS: Don't the dealerships and chains have a big advantage over the independents in that regard?
D: Right. But most good independents are part of some organization that does the same thing.
WS: When I'm checking out an independent, should I ask the owner whether he pays his mechanics commission or salary?
D: Oh, boy. I'm not sure if that's a good question to ask during an initial meeting. It could sound like you're questioning his mechanics' integrity.
WS: But it's something I should know, isn't it?
D: Yes. But if you end up going with this guy, you're going to be seeing him a couple of times per year and building a relationship. It might be better to work it into a conversation a little further down the road.
WS: We've talked about the difference between independents and dealerships. I'd like to look at the business from your point of view. Describe your best customer. And your nightmare customer.
D: My best customer understands that we're going to do what needs to be done. We've been in business a long time, and 90% of our customers say, 'Here's my car. Check it over.' When I call them with an estimate, they say, 'If that's what you say it needs, that's what it needs. If that's how much you say it's going to cost, that's how much it will cost. Fix my damn car!'
WS: And the nightmare customer?
D: The nightmare customer is the guy who goes on the Internet and thinks he knows more than I know. (Thankfully, I don't have to deal with many of them.)
This customer goes online and sees he could buy the part that I put on his car cheaper than what I sold it to him for. Guess what? I can go on the Internet and buy any part on the Internet cheaper than what I buy it for.
But I pay my suppliers for a certain amount of convenience and competence. I trust the parts they sell me are correct the first time and are good quality. I, of course, charge the customer more than I paid for the part…because that's how you stay in business.
Another nightmare customer is the one who wants me to take the part he bought online and install it for him. Some shops will do that. I don't.
WS: Why not?
D: I know nothing about the part. I don't know its origin or quality, and I can't warranty anything I don't have confidence in.
WS: Should women be more concerned about getting ripped off than men?
D: Surprisingly, men are more likely to get scammed. Women are harder to take advantage of because they ask a lot of questions. Guys think they should know all the answers, so they don't ask.
I could tell a guy that his framus valve is bad, and he'll say, 'Okay.' And there's no such thing as a framus valve. But he's a guy. So he's not going to say that he doesn't know what a framus valve is. A woman will say, 'What the heck is a framus valve?' Shady operators are scared to death of women because women ask those questions.
The takeaway is that nobody should be shy about asking questions. If you ask a question and get some crazy answer, be afraid. If your mechanic can't tell you what he's doing to your car and why…get the heck out of there.
By the way, answering questions is one thing the dealerships and chains do very well. The people you talk to there are sales professionals… They may have some automotive background, but their real job is to make sales.
Independent guys, though, most of the time, are not professional salesmen. They're professional mechanics who own their own businesses. Don't hold it against them if they don't speak well. If they understand the problem with your car and can explain it to you…that's what matters.
WS: Anything else?
D: Trust your instincts. It's almost like going on a date. You want to feel the other person out and make sure you trust them. If you walk out of the shop thinking, 'Something just ain't right,' it's time to find someone else.
WS: Thanks, Dinesh.
Let me start by saying that I'm not anti-broker. Though much of my experience with brokers has been negative, not all brokers are bad. I work with a very good one now. And for reasons I've explained in a previous Creating Wealth essay, I'm happy to pay him the lakhs of rupees per year he earns managing my account.
If you have a lot of money - and you know how to work with them - brokers can be very helpful. But even if you do find a good broker, never let your guard down. Because from what I've seen, the brokerage industry was designed to siphon off your wealth one bit at a time. The amount they take on any individual transaction may not seem like much. But over a lifetime of investing, it can amount to a big chunk of your wealth.
Thus, in this issue of Wealth Stealers, we will focus our distrustful eye on the brokerage industry.
Let's begin with a story from The New York Times that illustrates one way unscrupulous brokers can steal your wealth.
Elaine and Merlin Toffel, a retired couple in their 70s, thought they might need help with their investments. They had most of their retirement money ($850,000) in a bucket of fixed income and liquid funds.
But they were concerned about the asset allocation of their portfolio. They weren't sure if it was still appropriate for them at this point in their lives.
'We wanted to make the most amount of interest we could so if we needed it to live on, we could use it,' said Mrs. Toffel. So they went to their bank relationship manager and asked for his advice. Instead of merely adjusting their existing portfolio, he had them sell off everything in it. He put $200,000 in money market funds. As for the rest - more than $650,000 - it went in variable annuities. The annuities were invested in mutual funds, which, he claimed, would pay 5% per year in income.
According to Forbes, variable annuities (what you call ULIPs in India), are 'a mutual fund type of account overlaid with a thin layer of insurance. If you fund an annuity with after-tax money, all future gains are tax-deferred (taxed at a higher ordinary income tax rate than capital gains rates). If you fund an annuity with tax-deferred dollars, you're not doing much except adding a layer of unnecessary fees.'
Of course, the broker didn't mention this to the Toffels before they sunk $650,000 into them.
Soon thereafter, Mr. Toffel, 78, was diagnosed with Alzheimer's disease. Mrs. Toffel wanted to move him into a nursing facility and buy an apartment for herself in the same senior community. But she needed more cash than the $200,000 they had in money market funds. So she contacted the broker to tap into the rest of their money.
That's when she got the bad news. To get the money, she would have to pay a 7% surrender charge of $45,000. The broker hadn't made that clear when the Toffels signed with him.
Mrs. Toffel soon discovered that there were other things the broker hadn't fully explained. She learned that variable annuities come with a hefty charge. In their case, it was about 4% of the amount invested, or more than $26,000 annually [The charges in ULIPs are initially higher, sometimes upto 6%; and then come down to about 1.5-2% annual after 3-4 years]. She also learned that when the broker had them sell off all the funds in their portfolio, there was a tax consequence. They had to pay capital gains on the profits.
The fact is, in the brokerage business, there are few things as lucrative as selling variable annuities. Needless to say, the broker didn't tell them that, either.
'While many brokers do right by their clients, others push bad products at high prices,' said Knut A. Rostad, co-founder and president of the Institute for the Fiduciary Standard. 'They do so because their culture celebrates sales. They do so because they can.'
Broker, Investment Advisor, Financial Planner: What's the Difference? 'Consumers are confused by the many titles that financial service providers use, which, in conjunction with industry misrepresentation, makes it difficult for them to find competent and ethical financial planners,' says the Financial Planning Coalition.
Here's some information to help clear up the confusion.
Brokers Also known as wealth managers, wealth advisors, investment consultants, financial advisors, financial consultants, and registered representatives.
Be registered with the Securities and Exchange Board of India (SEBI) Be a member of the stock exchange Be qualified to sell other products, like to sell mutual fund you need to be AMFI Registered Advisor, to sell insurance you need to become an insurance agent after clearing IRDA Exam, and now you even need to register as an investment advisor. You pay brokers a commission on each transaction they make on your behalf.
A stockbroker or sub-broker is required to make 'suitable' investment suggestions based on your income, risk tolerance, investment objectives, and overall financial situation. But stockbrokers are not fiduciaries. And that is very important.
Fiduciaries are legally authorized to hold assets in trust for you. And they have the legal obligation to protect and manage those assets solely for your benefit, not for their own profit.
[The word 'fiduciary' is derived from the Latin fiducia, which means 'confidence/trust.']
Because brokers are not fiduciaries, they are under no legal obligation to act in your best interest.
Investment Advisors Also known as investment managers, portfolio managers, wealth managers, and asset managers.
Investment advisors are in the business of providing advice or making recommendations on various types of securities. Unlike stockbrokers, investment advisors are fiduciaries.
Investment advisors must 'obtain a certificate of registration from SEBI on and from the commencement of Investment Advisers Regulations unless an exemption specifically applies.' [The Regulations are available on the SEBI website www.sebi.gov.in. [Ref. Regulation 3(1)]]
You may pay an investment advisor an hourly fee, a fixed fee, a commission on the products they sell you, a percentage of the value of the assets they manage for you (also known as a 'wrap fee'), or a combination of the above.
Note: Some investment advisors are also brokers, but most brokers are not registered investment advisors. The investment advisor has the fiduciary responsibility. The broker does not.
Certified Financial Planners Financial planners are in the business of helping their clients achieve financial objectives. They often specialize in asset allocation, estate planning, insurance, retirement, risk management, or tax planning.
But there is a big difference between a financial planner and a certified financial planner (CFP).
Certified financial planners must:
Be certified by the Financial Planner Standards Board India Pass extensive exams on asset protection planning, taxes, insurance, estate planning, and retirement Maintain their certification by completing yearly continuing education programs. You may pay a certified financial planner a fee or a commission on investment products they sell to you. The fee could be a flat rate, or a percentage of your assets and/or income.
Many people prefer fee-only CFPs. The idea is that, because they don't charge commissions, their advice is more likely to be unbiased. But keep in mind that, like investment advisors, all certified financial planners are fiduciaries.
The FPS Board's Code of Ethics says this: 'Placing the client's interests first is a hallmark of professionalism, requiring the Financial Planning professional to act honestly and not place personal gain or advantage before the client's interests.'
What I recommend: If you read Creating Wealth and follow the financial planning ideas of the Wealth Builders Club, you may feel comfortable making your own decisions about asset allocation, buying and selling strategies, and which investments to make. I certainly feel that way.
But if you want to hire someone to help you make those big decisions, you should keep these distinctions in mind. Recognize that stockbrokers and financial planners are not legally required to put your interests ahead of their own. Investment advisors and certified financial planners are.
Also, don't let yourself be intimidated by the financial jargon they'll throw at you to either impress or confuse you.
Here's How They Do It I wish I could tell you that the Toffels' experience was a rare exception in an otherwise honest industry.
But let's be realistic. Stockbrokers are employees of a brokerage firm. They are paid by the firm to increase net sales. (Net sales include fees and commissions.) There are only two ways a broker can increase net sales: by (a) acquiring more clients and (b) wringing extra fees and commissions out of those clients.
In the case of the Toffels, the broker did that by putting them in annuities with huge commissions, high fees, and steep penalties.
Another way unscrupulous brokers boost net sales is by 'churning.' That's what it's called when a broker frequently buys and sells securities for a client with the sole purpose of generating commissions for himself.
An example: Over a period of two years, three brokers at the independent broker-dealer JP Turner and Co. racked up $845,000 in commissions for themselves, losing clients $2.7 million in the process. The turnover rates of the churned accounts were so high that annual investment returns would have to have been 73.3% for the accounts to break even.
The Commission Split Many investors don't realize that when they pay a commission, the broker and the firm split it. What's the split? It depends on how high a producer the broker is. High-producing brokers can get up to 60%. The majority get about 25-30%.
The split depends on how much revenue the broker is bringing in. That includes the total monetary size of his accounts and the amount of money he is making for the firm in sales.
Initial Public Offerings (IPOs)
A less commonly known way for bad brokers to boost net sales is through the sale of initial public offerings (IPOs), or new issues. These are stocks that are introduced to the public market for the first time.
Here's how the scam works: Let's say a company is preparing to list its shares on the New York Stock Exchange (NYSE). Before it does so, it teams up with a brokerage firm (or firms). The brokers then divide up their ration of shares, sell them to their best clients ahead of the IPO date…and make a bundle on commissions. [In India this is what is called the grey market of IPOs.]
The hype behind IPOs is that it's an 'inside' way to make quick profits on a stock. And there are, indeed, cases where share prices for new issues skyrocket. Your broker kindly puts you into one…and you sit back and wait for the brokerage industry to start promoting it. If it's a hot IPO, it can climb 25%…even 50% on the first day it's made available to the public. If you are smart, you sell it immediately and take your profits.
I've had brokers offer me new issues to 'thank' me for having large accounts with them. And some of those new issues did very well. But I always felt awkward about it. It felt like inside trading - even though it is perfectly legal. Other clients didn't get the chance to get in at the same time. How is that a free market?
I profited from the IPOs because I sold them quickly. I knew I was buying them for the wrong reason. I knew nothing about them. I just figured my broker wasn't going to be stupid enough to put me in a bad one. But once I began to take stock investing seriously, I stopped taking new issues. It didn't jibe with the way I made money privately: by investing in businesses I knew inside and out and had some control over.
I suppose I could have continued to profit from these givebacks. But I had already learned that the little chunks of money I could get from new issues paled when compared to the big money I could earn by investing in, for example, value stocks.
Most Wealth Builders Club readers will never be given the chance to invest in the kind of new issues that were offered to me. Those who buy into the new issue hype will be investing in…how shall I put it…less serious companies.
They will be placing a bet that the brokerage community will support these companies. That after they acquire the new issues, they will be able to sell them at a profit.
But the long-term reality contradicts this assumption. According to research, IPO stocks have a tendency to underperform over a three- to five-year period when compared to the average three-year return of similar non-IPO stocks.
So new issues are not such great investments. But does this mean you're being ripped off if you buy them?
Yes. New issues - and most investors don't know this - are expensive.
Brokerages and investment banks typically make, on average, a total of 3-7% on the new issues they sell.
They make this money cleverly. Sometimes you are told you will be charged 'nothing.' But what that means is that there are no immediate commissions. It doesn't mean there aren't transaction fees and other hidden charges. And they don't tell you - except in the fine print - that, to buy the IPO, you are being put into a fee-based account. After a period of time - six months to a year - you get hit with the full fee for that account, usually 2%.
A secondary offering is when a company issues new stock for public sale after it's already made its initial public offering.
As with new issues, brokers 'rob' you here with transaction fees, hidden charges, and the fees you get hit with because they put you into a fee-based account. And, as with new issues, your total costs end up being 3-7%.
Editor's Note: If you found this piece interesting, let us know at email@example.com. Mark will soon write more about the ways you should be wary of stockbrokers.
Brokers provide a service. They buy and sell stocks and bonds for their clients, and sometimes they manage their money. They also sell a variety of esoteric investment products, some of which I'll describe in a moment.
We would like to think that a broker's job is to make his clients richer. And there are certainly plenty of brokers out there who want to do that. But the brokerage industry is not set up to make the client's interest a priority. When it comes to the question of 'Who's my boss?' the answer, for most brokers, is 'My brokerage house, not my client.'
As I explained in the first installment of this series, there are all sorts of ways for brokers to make money from their clients. These include asset management charges, hidden fees, outsized commissions, churning securities, and so on.
In this installment, I'm going to address some of the other ways that brokers can 'steal' your wealth.
'Structured Investment' Products Structured investment products? If you asked a broker, he might tell you (reading from a brochure) that they are 'customized investments designed to match the investor's risk tolerance.'
Actually, this is a catchall term for dozens of esoteric financial products with such names as 'reverse exchangeable notes' and - get ready - 'capped contingent buffered return enhanced notes.'
So what are they?
I can say this from experience: They come with a heap of investor gobbledygook that seems to promise reasonable to high returns with little or zero risk. But these things are so complex that many brokers are unable to explain how they actually work.
I actually had to call in a leading research analyst I know to help me understand this nonsense. After several drafts, here's what we came up with…
Structured investment products, and duration funds, are often pitched as fixed-income instruments for people in need of yield (i.e., income). And on the surface, they can look like debt securities that can generate guaranteed income.
You might, for example, be told that structured notes are 'just like bonds' in that, when you hand over your hard-earned money, you receive an IOU that pays a certain amount of interest.
But structured notes are not bonds. The underlying mechanics of structured notes are dramatically different.
When you buy a bond, you're assured a rate of interest and the return of your principal upon maturity. With a structured note, instead of your payoff coming from the issuer's own cash flow - as it would if you bought a bond from, say, a utility or a private company - it comes from the future performance of some financial asset or group of assets.
Meaning: Your note's performance may be linked to anything, from a single stock, to an entire index, to currencies, or to commodities.
This is a big difference. You see, when you buy a structured note, you aren't obtaining an actual security. It's a synthetic security. And its payoff is anything but guaranteed.
In simplest terms, a structured note pays out X if the underlying asset or assets return Y. The financial engineers who create these notes do all sorts of backtesting to prop up their claims of how the note will perform. But there is no way to know for sure.
And if their assumptions turn out to be off the mark, you will be left holding the bag.
The most publicized case involving structured notes that 'missed their mark' occurred in 2008, when Lehman Brothers' 'Principal Protection Notes' (good name, right?) became worthless. Millions of dollars' worth of these notes were sold to individual investors who were looking for safe, low-risk investments.
Here's an example of how structured notes work - one that's similar to the many we encountered in our research…
You decide to pay a visit to your broker. You're in desperate need of income. Given the low-rate environment we're in today, your broker has to get creative…
'What about a structured note?' he asks. 'It's similar to a bond. The one I have in mind will pay about 16% interest annually, plus the return of your principal when the note matures in six months.'
He explains a bit about the risks - something about the note being tied to an individual stock. It all sounds very complicated…but he seems to know what he's doing. So you leave it in his trustworthy hands. You give him the green light…and $20,000 for the investment.
On your way out, your broker hands you a ream of paper - the investment's prospectus…
'For when you get some time,' he says. 'Be sure to read through it.'
Six months later, you still haven't gotten to your broker's reading assignment. But in reviewing the financial statements he's sent over, you notice something a little odd. You decide to put in a call to him. (Let's call him Bill.)
'Bill,' you say. 'I'm looking over my statements now. Quick question: Why do I have about $13,000 worth of JetBlue stock? I don't remember authorizing that purchase.'
Meanwhile, there isn't a trace of that structured note you bought.
So, what happened?
As I mentioned earlier, when you buy a structured note, your investment outcome is linked to a security, some other asset, or a group of assets. How that asset performs determines what you get in return.
In this instance, your note was tied to the performance of JetBlue, an American airline that trades on the Nasdaq under the symbol JBLU.
[Note: In India, the larger chunk of funds collected in structured products is invested in fixed-income instruments and the rest in derivatives where the underlying asset is the main return generator. They are generally linked to Nifty index on the equity side; and on the fixed income side it is mostly linked to NCDs i.e. Non-Convertible Debentures of highly rated issuer.]
The idea - structured into your note - was that if JetBlue performed well and stayed within the stipulations (more on this in a moment), you would earn 8% interest upon maturity of the note in six months (half of the 16% annual payout). As well as the return of your $20,000 principal.
So far, so good…
But here's what you didn't understand when you invested in that note: If, at any point, JetBlue's share price dropped by a certain percentage - say, 20% - the so-called 'note' would convert to shares of the fallen stock.
Many structured notes are built this way. If the underlying asset drops below a certain price point, bad things can happen. Industry jargon for this threshold is the 'knock-in' level.
As long as the underlying asset is above the knock-in level, you can expect to get back your principal (plus return) upon the maturity of your note. But if your note matures and the asset is still below the knock-in level, you'll be the proud owner of those underwater shares.
That's how $13,000 in underwater JetBlue stock showed up on your financial statements.
[Note: In India, the products are designed in a form where the proportion of money invested in debt (say Rs 70) grows and reaches (Rs 100) so that the value of the portfolio is at least equivalent to the invested principal on Maturity (i.e. Rs 100). The remaining Rs 30 will be linked to equity markets and over the period it will grow in line with equity markets.
Such structured products are popularly known as Equity Linked Debentures. Some even call these Capital Protection Funds, where one can get equity-linked returns by investing in structured products that aim to protect ones capital.]
There's Something in It for the Client - Not Much, But Something Structured products are derivatives - essentially, contracts with values determined by fluctuations in the underlying asset. According to experts I've consulted, financial services firms built these products so that unsophisticated investors could participate in option-like strategies. And they could do so without needing to get the approval most brokerages require for such trades.
But the main reason firms create these structured products is more self-serving. The broker receives a commission (often a generous one) for placing them in a client's account. Plus, the firm generates fee income for the creation and management of the note…and if the client ends up losing money.
As the old saying in the brokerage business goes, 'two out of three ain't bad.'
Another feature you discover: It turns out that structured notes are very illiquid. Meaning: Because they're esoteric and controlled by a limited number of institutions, they don't have much of a market and rarely trade after issuance.
That makes it difficult to sell them as readily as you'd be able to sell stocks or bonds. So forget about having immediate access to your money. Or being able to sell a note quickly if you see the price of the underlying asset dropping.
The Greed Factor Why would anyone want to invest in a structured product?
One reason is greed. When someone says they can sell you an investment with a 'guaranteed' 16% return while CDs are yielding a fraction of a point, it's easy to say yes. That complicated fine print just becomes 'something my broker should know about.'
Another reason is clever marketing. Many structured notes are named to sound reassuring (e.g., Lehman's 'Principal Protection Notes,' mentioned above). Coupling a decent return with an implied safety factor makes these notes sound mighty attractive.
But why would your broker recommend these innocuous-sounding things to you? A big reason, of course, is that there's a commission in it for him. And he might even think he's doing you a favour.
But most brokers don't understand these products at all. As a result, a lot of the fine print is left unexplained, and investors have no clue what they are buying.
No surprise when some of the fine print looks like this example I found in Bloomberg:
The notes are designed for investors who seek a return of 1.5 times the appreciation of the S&P 500 Index up to a maximum return of 14.00% at maturity. Investors should be willing to forgo interest and dividend payments and, if the Ending Index Level is less than the Initial Index Level by more than 10%, be willing to lose up to 90% of their principal.
Huh? There's a lot going on here.
For instance, notice that the returns have a cap. This is a common feature of structured products. Having a cap on your returns means that even if the asset linked to your note does break out and perform well, you're entitled to your share… but only up to a certain percentage.
And notice the possibility of forgoing dividends. In fact, most structured notes don't pay dividends to investors, even if the underlying asset does.
If there is a dividend, your brokerage will get it. And in the event you are left holding an underwater note, your brokerage can continue to collect on the underlying asset's dividends while you play the waiting game.
Finally, another red flag in the above example: You need to be willing to lose a great deal of principal - as much as 90%, if your index level breaches the knock-in level of 10%.
Given all this, what do I think of structured investment products?
Look, I have no doubt that it's possible to make money with these sorts of investments. I actually know of a number of people who do. But for me - and I'm willing to bet for the average investor - they are far too complicated and have way too many variables to keep track of.
Investing in structured products breaks my No. 1 rule: Don't invest in anything you don't understand.
For this reason, I wipe my hands of them.
Variable Annuities Brokers earn more money from variable annuities than from any other financial product. With commissions as high as 5-9% [in India it may be 3-5], it's easy to see why they love pushing them.
Their target audience is senior citizens. Tapping into their fears of running out of money in retirement, brokers offer worried oldsters the promise of guaranteed income for the rest of their lives.
There are two kinds of variable annuities [In India this is sold under Insurance as 'Pension Plans']. The first is an immediate annuity. In this case, you make a single, lump-sum deposit, and you are guaranteed to get a payment every month until you die.
The second kind is a tax-deferred annuity. In this case, the money you invest grows tax-deferred until you decide to take it out [Mutual Funds as well as ULIPs (Unit Linked Insurance Products) offer this benefit]. The rate can either be fixed or variable. Increasingly, these annuities are tied to mutual funds.
This type of annuity sounds particularly appealing. You get the tax deferral. You decide when to take it out. And the return can be fixed or variable - it's up to you. But there's a hitch. Actually, several:
Tax-deferred annuities come with a host of annual fees, ranging from 1.4-3%. Investment options are limited and usually have high underlying expense ratios. If you decide you need to withdraw some of the money, it will be taxed at your ordinary income tax rate. Many times, in addition to the income tax, you will have to pay a 'surrender fee' (a penalty) of as much as 9% (even more if you make the withdrawal during an initial period). Annuity payments are usually taxed as regular income, rather than at the capital gains rate. A study by Richard Toolson of Washington State University compared individuals in the highest tax bracket to see how they would fare if they invested their funds in a variable annuity or in a lower-turnover stock index mutual fund.
The study found that the heavy fees and taxes associated with variable annuities chipped away so much of the investment basis that the mutual funds always outperformed the variable annuities.
Variable annuities [what we call Unit Linked Insurance Plans] have always seemed to me to be an expensive and overly complicated financial product that I never feel I understand well enough. And as you know, I try to avoid investments that I don't fully understand.
High-Load Mutual Funds In India, Mutual Funds are sold as Regular Plans (where broker is involved) that have high expense ratio, and Direct Plans (sold directly by the fund house) that have low expense ratio. Mutual fund companies sell these directly, without brokers and without commission fees. And most brokers don't talk about them…for obvious reasons.
Aside from fees, there's something else to consider with mutual funds. The rate of return you get depends on the skill of the fund manager - the stocks he picks and how he buys and sells them. And most of them don't do a great job.
'Overwhelming evidence proves the failure of the for-profit mutual-fund industry,' says David F. Swensen in his book, Unconventional Success.
'Mutual funds extract enormous sums from investors in exchange for providing a shocking disservice,' Swensen says.
Bottom line: Don't give your money to the WRONG mutual funds.
If, however, you have zero interest in picking stocks and you're fine with simply matching the performance of a market index, you might consider a no-load index fund.
[If you're looking for a reliable list of Mutual Funds check out PersonalFN's mutual fund guide that we shared with your Retire Rich membership].
How Much Does 2% Cost? There is even some evidence, according to economist Burton Malkiel, that brokers themselves don't fully appreciate how all the rates, fees, and commissions add up. They are under such pressure to sell investments, he says, that they don't stop to figure out how much their clients are paying.
This chart will give you an idea of how fees affect your bottom line:
The Wealth Stealers #11:<br>The Many Ways Unscrupulous Stockbrokers Steal Your Wealth - Part 2 As you can see, over the course of 40 years, a simple 2% fee could rob you of more than $250,000.
A Few More Sneaky Tricks In case I haven't yet convinced you to be skeptical of brokers, here are a few more tricks of the broker trade.
Lying: Brokers troll for new customers by telling them that they can consistently beat the market and generate high - say, 20% - returns. Ignoring Instructions: The broker you've trusted ignores - yes, ignores - your instructions to buy or sell a security or follow a particular strategy. Exposing Profits: Your account has appreciated tremendously, but your broker 'forgets' to implement a strategy to protect your profits. Churning: The broker executes trade after trade in your account - not to generate profits for you, but to generate commissions for himself. When - and How - to Use a Broker If brokerages could promise to earn you well more than the 1-3% they charge for their services, it would be a fair deal. But they can't do it. So it makes no sense to pay their fees.
However, if you are a small or medium-sized investor, you can use an online discount brokers that allow you to make your own trades, charging you a minimal fee for each one.
Their platforms are incredibly easy to navigate, even for someone new to trading. You can track your portfolio, research new stocks, and analyze charts with differing variables.
If you have a lot of money in stocks and you are too busy to manage it yourself, you might want to use a full-service broker. Not for everything, but for some trades.
I use three brokers to manage about 20% of my net worth. I pay one of them about $50,000 per year. That's a lot of money, but it's worth it because I get a great deal of service from him. I can't afford to spend the time it would take for me to do what he does for me. I'm better off focusing on making money with my other investments.
If you do decide to go with a broker, make sure he communicates with you regularly. You want to hear from him, for example, when anything happens that could affect your portfolio (a war, an oil spill, a rate hike by the reserve bank, etc.).
Most importantly, feel free to call him, ask him questions, and nag him as often as you need to. Remember: He works for you!
Modern cars are complex. It takes special equipment and expertise to diagnose mechanical problems. And that makes the average consumer an easy target for scam artists and opportunists.
In last month's Wealth Stealers, we talked about how to find a trustworthy mechanic. This month, we'll continue our conversation with Dinesh - an auto mechanic, to get the inside scoop on car repair fraud.
Wealth Stealers (WS): What are the most common repair rip-offs?
D: There are three main categories: One, you may be charged for unnecessary work. Two, you may be charged for work that wasn't done. And three, you may pay for OEM (original equipment manufacturer) parts when cheaper aftermarket or used parts were actually installed.
WS: Let's talk about the unnecessary work first.
D: The most common example is premature service. When, for example, your mechanic says you have to replace your transmission fluid or brake fluid, and it really doesn't have to be changed.
WS: What's the best defense against this rip-off?
D: You've got to be an educated consumer. Every owner's manual includes the manufacturer's recommended maintenance schedule. So, if the manufacturer says to change your transmission fluid every 100,000 km, and your mechanic is telling you - at 30,000 km - that you need to do it, that's a red flag. But if you're getting close to 80,000 km…well, maybe you really do need to change it.
WS: Same thing with brake fluid?
D: No. Brake fluid is 'hydroscopic'- meaning it absorbs moisture. Even if a car isn't driven, the brake fluid will wear out. It won't change color. You can't look at it to see if it has to be changed. Your owner's manual will give you an idea of when it should be done, but it really depends on where you live.
Transmission fluid is just the opposite. That's something the car uses. The more you drive, the sooner you have to replace it.
WS: What about air filters? And cabin filters?
D: Again, consult your owner's manual. And, again, keep in mind that the manual doesn't know where you live. You replace these filters according to need, not mileage. If you live on a dirt road, you'll need a new air filter more frequently.
And if you park under a tree every day, your cabin filter will get full of decaying organic matter, and you'll need to change it regularly. But if your car is always garaged, the filter will last two to three times as long.
WS: Okay. How can we avoid the filter scam?
D: If you don't trust the mechanic 100%, you could ask to see the used filter. But a devious mechanic might just give you a used one that he had lying around.
The best way to avoid all repair scams is to keep good records. You should have the receipt for every service you've ever had done on your car. That way, you can compare what is being recommended with what you've had done in the past.
WS: What other scams should we be on the lookout for?
D: Be wary of the upsell. You come in for a particular problem, and you're told that you have another problem in the same or maybe a different area. That would scare me a little. It doesn't necessarily mean you're being scammed, but it IS a yellow flag.
WS: What's your opinion of oil changing?
D: An oil change is like a physical exam. I would never go to my doctor and ask him to give me a quick look. When you get your oil changed, it's an opportunity for a good mechanic to carefully check out your car and find things that are about to become problems or are already problems.
WS: How often should we get our oil changed?
D: It depends on your driving habits. (And you really can't change the oil too often.) Independent mechanics tend to recommend more frequent oil changes than dealers. Typical recommendations are between 10,000 and 12,000 kilometers. Maybe a bit longer if you use synthetic oil.
WS: What's the biggest mistake most drivers make in maintaining their cars?
D: Putting off oil changes is No. 1. But No. 2 is not keeping their tires properly inflated. The average tire today probably costs Rs 5,000-10,000. And the fastest way to wear out tires is to run them underinflated. What you save in tire wear by maintaining the air pressure would pay for many full-service oil changes.
WS: Speaking of tires, how do you feel about Internet dealers that sell wholesale to the public?
D: I can't beat their prices. My local supplier has to charge me more than you would pay online because he's got overhead. He has to buy the tires, store them, and deliver them to me. So they cost me more, and I have to charge my customers more.
But…if you need tires, I can put them on the same day. With online dealers, you have to wait for delivery. And then you have to find someone to install them. And if you get a defective tire, you have to send it back to be inspected.
Meanwhile, you either have to buy another new tire and pay someone to install it or not drive until the dealer resolves the problem.
WS: Should our readers always get a second opinion on car repair estimates?
D: If it's a major repair, yes. If you're looking at a big repair estimate and you don't have complete trust in your mechanic, it makes sense to get another opinion.
WS: That's what Rahul did when he asked you to check out the long list of problems the Honda dealer supposedly found on his car. And you saved him a lot of money, right? (To read the first part of this article, go here)
D: Right. In fact, I see a lot of lists like that. And though I hate to generalize, they usually come from places where everyone is on commission and trying to get as much out of their customers as they can.
But remember that some second opinions can be expensive. Computer problems in particular are costly to diagnose. But if your mechanic says you need a lot of suspension work…that's the kind of thing that's pretty cheap and easy for another mechanic to check.
WS: Let's talk more about parts. Isn't that an area that's ripe for scamming?
D: Absolutely. An unscrupulous operator might charge a customer for OEM parts and then install used parts or poorly made aftermarket parts. Or not replace the parts at all. You should always ask to see the parts that were replaced until you trust the shop.
WS: Should we insist on OEM parts?
D: OEM parts are usually the best parts you can buy. Aftermarket parts range from just as good to complete crap. (It's my job to know the difference.) There are some parts that I will buy only from the manufacturer. But OEMs cost more. So if you insist on OEM parts, your job might be more expensive than it has to be.
We use aftermarket parts about 60% of the time to save money. But I'm very particular about the aftermarket parts I use. They have to be from sources I know and feel good about.
WS: What about used parts?
D: Bad idea… unless you need a solid piece of metal that you can get from a junkyard. But most car parts are electronic and/or have moving components. And a used one is just as old as the one that's already in your car. Even if it's not as bad as yours, it soon will be.
Would you want to pay a mechanic to install an old part that has virtually no warranty? I wouldn't.
WS: What is the best advice you can give our readers to help them save money on car repairs?
D: First, find a trustworthy mechanic. We've talked about that. Second, change your oil religiously. Third, keep your tires properly inflated. And, finally, get to know your owner's manual. Don't put off the recommended services.
If the manual says replace the timing belt at 150,000 km, just do it. It's called preventive maintenance for a reason. If you wait until something breaks to bring your car in for service, it's going to cost a lot more to get it fixed.
WS: Great advice. Thanks, Dinesh.
In native cultures, medicine men wield power because of the community's belief that they have magical powers. To reinforce their mystique, these crafty schemers invent words and phrases that their followers can't understand. The idea is something like: 'If you don't understand what I'm saying, how can you doubt my power?'
Modern-world medicine men - doctors, lawyers, and, yes, brokers - sometimes do the same thing. Like their primitive predecessors, they often wield power over their clients by verbally intimidating them.
Many people (consciously or not) put their brokers on pedestals of reverence. As a result, they are reluctant to question the advice they get, or worse, they feel compelled to follow it out of some sense of submissive gratitude.
The truth is that brokers are nothing more than tradesmen. They have knowledge and skills that they sell. To earn their fees, they must work hard and well for you.
So, starting today, I want you to change the way you think about your broker. Promise yourself that you will not let him bully you - that you will actively and consciously be the boss.
Rather than think 'Gee, he's such an expert,' think 'I am paying this guy good money. If he doesn't prove to me that he is an expert, I will fire him.'
And when you get advice, instead of thinking 'I had better do what he says,' think 'This guy may know his field, but he doesn't know me. I am the best and sole judge of what is best for me. Only I am qualified to decide what I should do.'
Three Criteria to Use to Rate Your Broker 1. Does he give you advice that is easy to understand?
A good professional feels obliged to communicate clearly with his clients. That means translating the technical language of his profession into advice that can be readily understood.
You can determine whether your broker has a commitment to communication by asking yourself:
Do I feel like I spend enough time with him? Or do I feel like he is usually busy and I'm taking up his precious time? When he sends me documents, does he often attach a cover letter that explains, in layman's terms, what the documents say? Do I frequently feel lost or confused when he gives me advice? (This should rarely happen. And when it does, you should feel free to ask questions and get clear, understandable answers.) 2. Does he understand and care about your concerns and needs?
A good professional doesn't treat all his clients exactly the same. He understands that each has his own specific concerns, worries, problems, and needs. A good professional takes time to understand this and tailors his advice accordingly.
If you feel like you are getting cookie-cutter advice from your broker - or if you feel like he doesn't really care who you are - he is not doing his job.
3. Does he make you feel like you are in charge?
A good professional relationship is one where the client is the boss and feels like the boss. You should be able to figure out how you feel about your broker instantly.
If you don't feel in charge, you aren't.
If you don't feel you can speak frankly about any fears and concerns you have, you are not in charge.
If you don't feel free to criticize him, you are not in charge.
Here's what you need to understand: The only way you can feel like the boss is if your broker feels like you are the boss. If he doesn't - if he thinks you are just someone who needs his help - you will never be in charge.
What to Do to Make Things Right Well…how do you feel about your broker now? Are you feeling a bit upset? Have you realized that you may be getting less from him than you deserve?
If so, here's what I suggest. Call or email the offending party and tell him you want to have a 15-minute meeting about your 'professional relationship.' If he asks why, say that you want to talk about whether 'the value I'm getting is worth the money I'm paying.'
If he refuses to have the meeting, you don't need to put another thought into it. He isn't doing his job. Get rid of him.
If he does give you a meeting, go in prepared. In just a few simple sentences (that you have prepared beforehand), tell him exactly how and why you are unsatisfied. Don't be judgmental.
Express your concerns as statements of your future expectations. In other words, don't say 'You talk in an intimidating way.' Say 'I want crystal-clear explanations of all your advice and full and clear answers to all my questions. Can you provide me with that?'
That's really all you have to do. If you end up 'firing' him, don't spend a moment regretting it. Just go out and find someone better.
And find that better broker by interviewing a few different ones. In the first meeting, list your expectations and ask if he can meet them.
Be the boss. It is your money.
Frank McKinney Hubbard, the famous American cartoonist, humourist, and journalist, better known as Kin, has aptly said, 'Nothing is as irritating as the fellow who chats pleasantly while he's overcharging you.'
In fact, many of you would agree and stand as testimony to an episode that may have left you feeling looted.
I was soliciting advice from my Charted Accountant (CA) to help me deploy proceeds from the sale of my land in Talegaon. I think the fellow looking at the value of the sales transaction overcharged me for advice on: tax planning and deploying the gains.
I thought of getting a second opinion then; but was of the view that a known devil is better than an unknown devil. Moreover, I was petrified as the financial year was drawing to a close. But now, after talking to you and understanding the prudent and unbiased approach to tax planning and investment planning, I feel I was looted and betrayed by my CA. - Mr Prakash Kothare, one of our financial planning clients.
In this materialistic world, professionals - such as CAs and lawyers - are expected to follow high fiduciary standards… But unfortunately they are turning into opportunistic hungry hounds. Only a few are practicing the profession with ethics and integrity.
So here are 6 points to check before you hire the services of CAs and/or lawyers…
A background check Conduct a thorough background check to ascertain the professional track record. This will help you know who you're dealing with. Don't shy away from asking for testimonials and contacting those who've availed of their services. While you do so, also try and assess if your case/situation is similar to what's been shared. Remember, today many CAs and lawyers specialise in certain areas like: direct tax, indirect tax, FEMA, transfer pricing, book-keeping & accountancy, tax audits, internal audits, etc. in case of CAs and certain branches of law viz. civil, criminal, property, labour law, tax laws, etc. in case of lawyers. Therefore, try and recognise this to ensure you're in the right hands - seeking advice from the right practitioner. Further, check if high fiduciary standards are being followed and there's a genuine concern for you - the client. Is your CA and/or lawyer pro-active and is there a follow-up team in place - the support and back-end staff. This will help you gauge if your queries will be handled in a timely fashion.
Infrastructure and value added services In addition to a background check, CAs and/or lawyer whom you wish to hire should offer robust infrastructure, as this helps you in the long run. For example, if you're looking for a CA he/she should be offering various calculators on his website viz. EMI calculator, annuity calculator, property calculator, tax calculator, stamp duty calculator, etc. - which are engaging tools that can help you stay in control of your finances better. This means you will not have to reach out to your CA physically for these calculations. Likewise, if you're looking for lawyers, he/she should make available tools to allow you to track your case, seek an appointment, and possibly even answer some of your basic queries. Technology today is an enabler; and it can make the process convenient, saving time and paperwork.
Transparency and openness We live in a knowledge economy enabled by information technology (IT) where data, information, and knowledge is available at the click of a button. Yet, to confirm a few basic things many CAs, lawyers whose professional practice leans on conventional ways, don't even divulge basic information without a fee. They fleece clients, especially those who're not so net savvy. Such conventional practitioners are insecure and best avoided. On the other hand, the new-age ones, who've adopted contemporary methods, try and keep their clients abreast vide newsletters, articles, forums, etc. thereby facilitating an open learning environment. Ideally, CAs and/or lawyers should make basic information available hassle-free, without having to dig into your pocket.
Determine the accessibility Usually CAs and/or lawyers are professionals whom you may need all round the year. Hence, try and assess how accessible they will be when you reach out to them. Many claim they're available round-the-clock for clients; but discern this in context to their bandwidth, energy, the team size, amongst a host of other facets, to assess if they can keep up with this tall claim. Do conduct reference checks, if need be. Further, prefer CAs and/or lawyers who're closer to your residence and/or work place - it just helps manage things more efficiently.
Method of remunerating Today many CAs and/or Lawyers charge on a man-hour basis (as result of the time spent), besides the retainer ship fee. Weigh the fees vis-a-vis the nature of your work, and in light of the aforementioned factors, get a better sense of the value you would derive from them. Don't shy away from asking pertinent questions. For example, if fees will be levied every time you call for advice. Needless to say, that CAs and/or lawyers, who carry a solid reputation and track record in a specialised area of practice, are bound to be pricey. Moreover, they will also factor in how complicated your case is.
Read the terms and conditions carefully Remember, the devil lies in the fine print. Therefore, make sure you thoroughly read the terms of service and ask pertinent questions before hiring a CA and/or lawyer.
Few final words… When you're seeking services of CAs and/or lawyers, it's like making a major financial decision. In fact, most of the advice sought from these professionals will also impact your personal finances. Hence when availing their services, list down a set of pertinent questions (don't miss anything) and discuss these with them in a frank manner. Also, don't expect to find the right CA and/or lawyer in the first meeting. The usual 30-45 minutes may not be enough to zero-in on one.
Further, if you've got to discuss a matter in brief, carry all important documents pertaining to it. Some professionals are objective in their approach and will appreciate you being factual, organised, and timely.
Thus, it's important to feel comfortable when you contract the services of CAs and/or lawyers; because against the fees you pay, the true value of their services needs to be derived.
Bankers become 'bhayankar' when they fail to deliver what they have promised and try to hard-sell products on which they earn more money to the gullible customer. - Ravi Subramanian
The path to managing your finances and investing begins with opening a bank account. And soon your banker or relationship manager offers you a host of financial services and products. You get offers for products such as credit cards, loans, recurring deposits, and fixed deposits. But they just don't stop there.
If not already, you are then labelled as a 'privileged', 'preferred', or 'priority' customer with a designated 'wealth manager' or 'relationship manager'. Before you realise it, you are en route to wealth destruction.
Access to all your personal and financial information As your wealth increases (represented by your bank balance or salary credits), banks act as a commission-based broker and begin to sell you third-party products such as insurance, mutual funds, and broking accounts. Sooner or later, they get you in touch with their wealth management services division where they will continue to steal and destroy your wealth.
Your bank account transactions are your personal business. But, whether you like it or not, banks and their relationship managers are privy to this confidential information. Your relationship manager or wealth manager will try to glib talk you into channelling your bank deposits in 'attractive' products that are aimed to 'grow' your wealth.
If you are not willing to bite the bullet and invest, they will send over an investment consultant who will try to convince you by ranting tongue-twisting financial mumbo jumbo.
Commission-driven advice Have you wondered why banks prefer to sell you insurance-cum-investment products over mutual fund schemes? It is simply because they earn a higher commission from insurance products. If you are retired, they offer annuities or traditional insurance products, on which you will earn a paltry return. If you are under 40, they will convince you to buy Unit Linked Insurance Plans (ULIPs), which are targeted towards retirement or securing your child's future.
A research study titled Misled and Mis-sold: Financial misbehaviour in retail banks? authored by Monika Halan and Dr. Renuka Sane, aimed to find out whether banks distribute products that are the highest fee generating without regard to consumer interest and whether the adequate disclosures were made.
Published in August 2016, the research study audited 400 bank branches located in Delhi, India. When the auditors visiting the banks asked for any tax-saving product, mutual funds were recommended 2% of the time, while fixed deposits and insurance were recommended 53% and 36% of the time respectively.
The study found that in private sector banks, where there was a high sales incentive, high commission products like insurance are recommended. In public sector banks, where there are deposit mobilisation targets, fixed deposits are recommended.
'A private sector bank manager is incentivised to sell the highest commission product because of his variable pay being dovetailed to sales. A public sector bank manager is incentivised to sell fixed deposits because his promotions are driven by deposit mobilisation targets,' the report explains.
Take a look at the front loaded commissions earned by banks…
Misalignment: Front loaded commissions Soldier (Department of Economic Affairs, 2015)
Bank relationship managers, cross-sell third-party financial products as it is a profitable business. They earn commissions and incentives - fill-up their own pocket through the products sold. In 2015-16, among the top-10 mutual fund distributors, based on commissions earned, six were banks. In the case of insurance as well, banks have the largest share of new business premium. Thus, for mutual funds and insurance companies, banks have become an important distribution channel.
What should you do? Most of you opt for the services or products offered by banks because of the convenience. This gets you dealing with your bank and having all your financial services under one roof. As not all financial products sold by banks are hole-in-the-bucket investments, you need to be aware of what your relationship manager is selling you and what your portfolio really needs. Here are a few action points that you need to take to protect your wealth.
Hire a fee-based investment adviser Clearly, your relationship manager may not put your interest first if there is a conflict of interest; so caveat emptor (buyer beware), indeed. You need to learn to make your own investment decisions based on your needs, investment objectives, and financial goals, with due consideration to your risk profile, and accordingly go about charting your asset allocation. If you aren't financially well-versed and numbers are not your friends, appoint an investment adviser who stands as financial guardian. SEBI-registered investment advisers are required to put your interests ahead of their own. Such fee-based advisers do not have a conflict of interest. Even if they do, they need to disclose it, as per the regulations. Once you have chalked out a financial plan, you can choose to invest directly (a preferred option) or through your bank if they are the distributors of the opted financial product.
Read the investment documents carefully If you choose to make your own decisions, don't get impressed and fall for the often-confusing financial jargon thrown at you by the relationship manager. At the end of the conversation, the only thing retained is probably the expected or projected returns. While relationships are built on trust, don't have blind faith and get lured by the stated returns. Do ask for the investment documents and read through them carefully and evaluate the performance track record over multiple periods (if available). Make sure this meets your risk profile, financial goals, and investment time horizon. If confused, ask questions relevant to your investment objectives and financial goals.
Take your time, don't follow the herd There is no need to feel pressured when buying a financial product. Make sure to do your own research before committing your hard-earned money to any scheme or product. If your relationship manager or wealth manager or even investment advisor is looking to close the deal quickly, there could be a conflict of interest. Take time to read, understand, and ask questions. Just because your friends or close family members have invested in a product, it does not mean you should too. Take time to conduct your own due diligence.
Don't sign blank documents Often when you or the relationship manager is in a hurry, they do not fill in the application form or other consent forms in front of you. They simply take your signature and fill out the form later. Form-filling can be a mundane task; however, it is a critical step that should not be ignored. In most cases of mis-selling, individuals have unknowingly given consent to certain terms and conditions or transactions which they probably would never have agreed to in the first place (had they read the fine print themselves).
Monitor your investments Investing in the right products is just half the marathon. It is vital to assess if the investments are performing to your satisfaction; because to err is human. Even the most knowledgeable financial experts make mistakes. If your investment returns fall short of what is expected and underperforms products with a similar investment objective, you may need to take the corrective course to align your investment portfolio prudently. This is why monitoring your investment is needed. You simply can't buy and forget. The end results can be disastrous. This does not mean you need to check the performance on a daily basis; once a quarter or twice a year should be fine. If you find this too cumbersome, hire a financial planner.
Remember, investing is a marathon and not a sprint. Moreover, good investing is dull and boring. So don't get swayed by what your relationship manager says; do your own homework and be a responsible investor.
Technology provides us with the convenience of avoiding mundane paperwork. However, unless precautionary measures are taken, technological advancement can produce nasty results as well.
Recently, the media broke the story of an unprecedented 32 lakh debit cards in India now vulnerable to fraud due to a security breach.
According to Business Standard, 641 people across 19 banks have fallen prey to online frauds involving Rs 1.3 crore. As per RBI data, there are 69.22 crore active debit cards in the banking system.
Technology is indeed a double-edged sword.
Here's the background: Hitachi Payment Services, which offers ATM, point of sales (PoS), and a whole host of other tech services related to payments, faced a large-scale malware attack. Fraudsters obtained financial and sensitive personal data of account holders. Transactions were identified in China and the US.
This incident rang alarm bells and woke up the banking industry. State Bank of India, ICICI Bank, Axis Bank, HDFC Bank, and Yes Bank have been buffeted by this high-profile scam. So far, Hitachi Payment Services has denied the breach, and its director, Mr Loney Antony, has been briefing the media about the case's latest developments. He recently said, 'We had appointed an external audit agency certified by PCI in the first week of September to check the security of our systems for any breach/ compromise based on a few suspected transactions that were highlighted by banks for whom we manage their ATM networks.'
He further added, 'The interim report published by the audit agency in September does not suggest any breach/compromise in our systems. The final report is expected by mid-November. The banks and card schemes are updated with the progress of the audit.'
Yes Bank also says it hasn't found a data breach in its ATM network.
Interestingly, this wake-up call came at a time just when the RBI was just about make banking consumers mindful of cyber security issues. In August, the RBI issued a draft circular limiting customers' liability in case of unauthorised transactions. If a client reports the fraudulent transaction within three working days from the date of receiving the communication, the client's liability shall be zero.
Acknowledging the seriousness and the delicacy of the matter, the Central Government swung into action with the Finance Ministry ordering National Payments Corporation of India (NPCI) to investigate. NPCI is expected to carry out a forensic audit and present a report on preventive measures to avoid such instances in the future. The Finance Ministry has also appealed the banking customers not to panic.
Banks, too, have gone into damage-control mode. They have either blocked the cards hit by the malware attacks or have asked their customers to reset their PINs. As a proactive step, some banks have considered replacing cards suspected of having their personal data security compromised. A few banks have asked their customers to use their branch network ATMs, claiming the security at networks operated by other banks may not be as well-equipped as their own to handle cyber attacks.
However, this advice has invited the RBI's wrath. The central bank believes it gives the wrong message to customers.
When a malware attack of such a large scale happens, the account holders can do little to prevent them. Only that, they don't flout the safety warnings and conduct everything right at their end.
Let's see why frauds happen in first place To know how scams of this magnitude happen, you must first understand how ATMs work. ATM companies install their machines at sites suggested by banks. Every ATM machine has two input devices - the card reader and the keyboard. And there are four output devices - display, speaker, cash dispenser, and receipt printer. Every ATM is connected to a host computer through a dial-up connection that links it with the bank's databases. Companies such as Hitachi provide services that connect ATM software and interbank networks.
Data confidentiality can be compromised in two ways: If the input devices are spied and personal information is stolen from the site of ATM. A company that links ATM software and interbank network faces cyber attacks. As a customer, you can't do much if the ATM is attacked by a virus, but you can take the utmost care to ensure the security of your debit/ATM card.
The RBI paper talks about shielding a customer in case of loss due to unauthorised transactions only if it's not due to customer negligence.
While the forensic audit will find out who's responsible for the data breaches; it appears that banks, ATMs, and software service providers, and bank customers are equally responsible for the data leakages. Some banks, despite several warnings, haven't replaced magnetic-strip-cards with Europay. Furthermore, the outsourcing of banking jobs such as ATM maintenance without ensuring adequate safety and security measures of the ATM architecture is also a huge compromise. The customers and service providers seem to be equally ignorant about their responsibilities.
11 steps to safeguard yourself against fraudulent transactions… When banks dispatch a credit or debit card, the first instruction they give is to change your PIN. If you don't take this advice, it's the first compromise to your card's security. To fix it, simply change your ATM PIN at regular intervals. You shouldn't share your confidential information with anyone, not even with your friends and relatives. Writing your PIN on a piece of paper or storing it on your cellphone is equally dangerous and should be avoided. Don't perform transactions at ATMs blindly. Before swiping your card and punching in your details, inspect the ATM for spy cameras. Also, be sure to cover the keyboard with your hand while entering your PIN. Try to set limits on your transactions and opt for one-time password wherever possible. E-tailers leave no stone unturned to keep their customers happy, including speeding up transaction times. As a part of that effort, they allow you to save your card details on their websites. If there are any security lapses on the merchant's website or the company providing payment solutions is not efficient to neutralise the malware threats, your personal data may be used to clean your account. As far as possible, use the virtual keyboard to access net banking. Avoid using shared Wi-Fi and free public internet facilities to perform personal banking transactions. Fraudsters often get their soft targets at such places. Many people use anti-virus and anti-malware software for their laptops and desktops. Yet, they leave their cell phones unprotected. Ensure your phone is protected if you use it to transact. You might be accustomed to receiving tens of emails every day from people you don't know. If you open them and they are spyware or malware, you expose yourself to a huge risk. Check the strength of your password and never use the same password for all your accounts. Don't take cyber security for granted. Be vigilant and report any discrepancy or a fraud as soon as you suspect it.
You can get much further with a kind word and a gun than you can with a kind word alone.'
This quote, attributed to the gangster Al Capone, paints a picture of the criminal mindset during the early 1900s. At the time, the threat of violence was the ultimate form of coercion for would-be thieves.
Not that armed robbery isn't a problem today. But the weapon of choice for today's criminals isn't a gun. It's the computer.
Cybersecurity company Symantec reports that last year there were over 1 million web attacks every day. Lloyd's, the British insurance company, estimates hackers cost businesses worldwide some $400 billion in losses each year. And experts say this staggering number will grow. One report estimates cybercrime will cost the world in excess of $6 trillion annually by 2021.
But it's not just companies that need to fear this epidemic. If you have an email account or a smartphone, you're a target.
To protect you from this 21st-century crime spree, this Wealth Stealers will look at the techniques employed by these thieves armed with only a computer.
In fact, you might be surprised to know that the methods used by these criminals are just high-tech versions of old cons, scams, and schemes…
The 'trickster' dupes people into revealing personal information. The 'rip-off artist' targets people who want to make some extra income using false but legitimate-sounding promises. But there is one thing they all have in common. They hit you where it hurts: the wallet.
The Trickster The trickster preys upon the ignorant and careless. His technique is called 'phishing' - a combo of the words 'fishing,' because he uses some kind of bait to lure you in, and 'phreak,' a person who hacked and defrauded via telephone in the '60s and '70s. But though some phishing takes place on the telephone, now it mostly happens in your email inbox.
The 'phisherman' wants your personal information, such as passwords, logins, Social Security numbers, credit cards, and bank account numbers. He may try to install spyware on your computer. He poses as a legitimate company or website.
Many phishing emails will end up in your spam folder, but some will find their way to your inbox.
Here's one I got recently:
Tell a Heart-Touching Story As you can see, this one is full of grammatical errors (circled), making it easy to spot. Yahoo has an army of proof readers who would never have let it out the door with these mistakes.
But not all phishing emails are so obvious. Check out this one that I got from a fraudster impersonating PayPal:
Tell a Heart-Touching Story There are two tip-offs that it's bogus. First, notice the odd phrasing of the response deadline. Second, the salutation (which I've hidden) is my email address, not my name. A dead giveaway.
In addition, like most phishing emails, it has a link and a threat. Two big red flags that should immediately make you cautious.
Take a look at this email that I got from my bank, 'Chase':
Tell a Heart-Touching Story At first glance, it looks real. It has no grammatical or spelling errors. The link, the threat, and the generic salutation are what give it away.
But some phishing emails look like they come from a friend or colleague. This is called 'spear phishing.' Rather than sending millions of emails to random email addresses, these phishermen target specific individuals or companies using an email address the recipient might trust.
Last year, Ubiquiti Networks lost $46.7 million in a spear-phishing attack. The phishing scam tricked employees into transferring funds to overseas accounts. The employees thought they were responding to legitimate requests from the company's executives.
This higher level of phishing isn't limited to big corporations. Social media sites like Facebook and LinkedIn can provide scammers with enough intelligence to tailor their messages to their targets to make their phishing emails seem authentic.
I got one email recently from one of my frineds. But there was no salutation. Just 'Check this out' and a link. Because I'm suspicious of any link in an email, I didn't take the bait. Good thing. Turns out my friend's email had been hacked. Clicking the link would have installed spyware on my computer.
The trickster also targets job hunters. He'll post a fictitious job online. When you respond, you're asked to fill out an online application prior to your interview. The application requires personal information like your Social Security number, address, bank account information, etc. In short, everything the phisherman - the trickster - needs to steal your identity.
But that's all just the first brand of scam you're likely to see online…
The Rip-Off Artist The rip-off artist isn't as subtle. He's after your cash, plain and simple.
His primary M.O. is stealing from folks looking to make some extra income. For instance, he might try to entice you with an offer… Something like, 'How would you feel about getting paid $300 per week for just driving your car the way you usually do? You only have to turn your vehicle into a mobile billboard.' And then he might show you a picture like this:
Tell a Heart-Touching Story The rip-off artist hopes that making $14,000 per year advertising for the Colonel will prove irresistible. After all, it almost sounds too good to be true.
Spoiler alert: It is.
Here's how this scam works. The rip-off artist sends you a check for, say, $800. Three hundred is for your first week's 'pay,' and $500 is to cover the cost of wrapping your car.
Your instructions are to deposit the check in your account and then wire $500 to the company that will do the wrapping. A few days after you deposit the check, your bank notifies you that the check has bounced. And the money you wired to the wrapping company? Gone into the rip-off artist's pocket.
Online marketplaces like Quikr and OLX are very convenient places for distant scammers. The buyer (the scammer) contacts the seller (the victim) and mentions that he lives at a distance. He requests the seller to ship the items to his place, and promises to pay him along with the shipping charges as soon as he receives the delivery.
But as soon as the items are shipped, he vanishes.
Professional scammers may even show fake bank slips to the seller - showing that they have initiated a transfer.
To stay safe from such scammers, follow what's stated below -
Ignore offers from people who, for whatever reason, can't do the transaction in person. Beware of offers involving shipping. Never wire funds. Don't accept cheques or money orders. (They could be fakes. And if the bank cashes a fake, it will hold you responsible.) Never give out financial info. (That would include your bank account number, Social Security number, PayPal account number, etc.) Meet your buyer at a public place. Maybe a coffee shop. And bring a friend along. Don't invite them to your home. Of course, with big items (like a sofa bed), this is impossible. Trust your gut. If something about the deal doesn't pass the smell test, don't do it. We have more advice for dealing with all of these internet scams at the end of the essay, but this list should protect you from rip-off artists if you want to make some money online.
Avoiding the Scams Internet crime promises to become even more prevalent in the years ahead. Why? As a famous bank robber once said, 'Because that's where the money is.'
So follow these 10 tips to minimize your chances of becoming a victim:
Guard your personal information like the treasure trove it is. Never give information in response to an unsolicited email, text, or telephone call. Delete personal information like your address, phone number, the schools you attended, etc. from your social media profile. Or classify them as private (for friends only). Don't befriend strangers on social media sites. It will give them access to pieces of personal information that may be used to steal your identity. It also puts your real friends at risk. Stick with plastic when you pay. Credit cards have fraud protection. Never log in to your financial accounts or email account from an unknown network. A scammer may be recording your information. If you travel frequently, consider using a VPN (virtual private network). You can see a ranking of VPN services here. Never buy anything online from or respond to an unexpected email with a link. Never click on a link or open an attachment from a source you're not 100% sure of. Only use sites that have 'https' in their URL, not just http. The 's' stands for 'secure.' It means all communications between your browser and the website are encrypted. Keep your software up to date. Hackers exploit security flaws in old software. Use strong passwords. Consider using a password manager. I use LastPass. It's free. If it sounds too good to be true, it is. An old adage, but never more appropriate in the new age of digital theft.