High net worth individuals are often drawn to exotic products and fall prey to unscrupulous money managers, says ET. They stay away from shoddy chit funds
and phoney plantation schemes. They are advised by top brokers and wealth managers. And they are always snooping around for smarter ways to make money.
They are the high net worth individuals or HNIs. But a lesser-known side to their story is how they can be amazingly gullible and unbelievably greedy — qualities that make them irresistible to unscrupulous money managers.
What makes the latter’s job easier is the reluctance of these investors to admit their mistakes. Just as the illiterate, hapless investors of ponzi schemes like Saradha,
these moneybags are being duped by ‘advisors’ promising extraordinary returns.
“I had surplus funds in my account and I was assured of liquidity and a fixed return of 14 percent per annum. I thought I would park some money for a year and make good gains,” said a 40-year businessman from Mulund, a Mumbai suburb.
The person invested heavy in the now infamous paired contracts traded on the National Spot Exchange. Thrilled at the payout he received in the second month, he reinvested the money only to find the entire investment sink in the next few weeks. He’s yet to share the story to his family members.
The lure of fancy products
Whilesmall savers are attracted by high returns, the well-heeled investors are drawn in by the charm of exotic products. Remember the Citibank Gurgaon fraud? A friendly, glib talking relationship manager even ended up fooling a well-known private equity fund manager who had trusted him to deploy
funds cleverly.
Such incidents are a reminder that many HNIs are only as smart as their poorer cousins when it comes to assessing financial products. “While HNIs are more aware of financial products and investment opportunities compared to retail investors, they tend to focus more on returns and not on the risks involved. As a result, some investors fall prey to structurally-flawed or fraudulent schemes that fail to match their expectations,” says Anshu Kapoor, who heads the global wealth management at Edelweiss Financial Services.
Some overestimate their sense of judgment in evaluating the potential of seemingly- exotic stuff and most consider tradition offerings generating relatively lower returns unglamorous.
Outsourcing pitfalls
Make no mistake. Very few HNIs blindly trust their brokers or intermediaries. They flood them with questions, spend hours trying to figure out
the best bet and often haggle over charges. But at the end of the day, they can be swayed by “an opportunity to make super normal returns on a risk-adjusted basis.” This is why crafty intermediaries make a killing.
“Some manufacturers or advisors do misuse this desire for higher returns,” says Swapnil Pawar of Karvy Capital. The absence of an industry-wide qualification for financial advisors also poses a challenge for investors looking for professional advice. But money managers ET spoke to said while it does put a question mark over the reliability and quality of advice offered, new rules are evolving and incidence of frauds will come down.
Beware of tall claims
Thanks to a choppy market, many are staying away from stocks, preferring stable products without default risks. If they do not see these two risks
in a product, they assume there is no risk. Here, they tend to overlook the hidden risks. It’s best to stay away from anyone claiming to sell products with zero risk, but high returns.
It’s a dangerous proposition. In fact, there are different types of risks one needs to understand before signing up for any product. Investors should assess the portfolio risk — which simply put means understanding how the money is deployed, whether it’s concentrated in certain assets, and can the institution find itself in a position
where it’s unable to even pay back the principal. If necessary, ask the family lawyer to browse through the document. Source ET.
