Trust your doctor, check your broker: The overlooked risk in financial advice

You submit documents not just once but repeatedly over time. Failure to do so can result in your accounts being frozen, blocking further transactions. This rigorous process is part of anti-money laundering guidelines ensuring institutions have up-to-date customer information.

The KYC paradox

However, while institutions verify your credentials, you seldom scrutinize the qualifications of those advising you on investments. Bank relationship managers, stock brokers, mutual fund distributors, and even social media financial influencers—are they certified to guide your financial future? Can you rely on their advice, and who is accountable if it leads to losses?

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In a hospital, you trust that doctors are professionally qualified and experienced enough to prescribe medications or perform surgeries. Similarly, in legal matters, you know that your lawyer holds at least a Graduate degree with an LLB, the minimum qualification for practicing law. However, when it comes to financial advice, you often overlook the qualifications or certifications of the advisors you rely on. Rarely do you inquire about their regulatory registrations.

You tend to assume that if someone is associated with a reputable bank or brokerage house, they must be certified. If a person writes popular blogs, has a significant follower base, or appears on television, you believe they must be verified professionals. This trust extends to social media, where you act on general recommendations without questioning the source.

The risks of free advice

You might find yourself willing to take advice from anyone promising high returns, especially if it’s offered at “low” or “no cost.” Even if not for high returns, the allure of free advice can be irresistible. Accept that cost is a major factor deterring you from consulting registered advisors. The second factor is the free flow of information, which you often mistake for knowledge.

New-age platforms exploit these factors by providing free information and investment portals. They engage you, gradually shifting your mindset towards borrowing, futures and options (F&O) trading, and stock trading, where they make money irrespective of your gains or losses.

The data speaks for itself.

According to a report by the Securities and Exchange Board of India (Sebi), mentioned in Mint, nine out of 10 individual traders in the equity futures and options segment experienced losses, with an average loss of ₹1.1 lakh in FY22. Additionally, 90% of active traders lost an average of ₹1.25 lakh during the same period. Among active traders (excluding outliers), the average loss was about ₹50,000 in FY22.

The average loss for those who lost money was over 15 times the average profit made by those who profited. Although this data is somewhat dated, today’s market has much higher volumes.

The need for qualified advice

Direct mutual funds were introduced to lower investment costs for knowledgeable investors and to bring transparency to the mutual funds’ cost structure. However, many fintech platforms have misused these funds to attract and mislead gullible investors in search of free services. While mutual fund investments have grown recently, there is still a significant gap between trading and investing volumes.

Investors need guidance from certified professionals to ensure accountability. They must invest wisely because they alone are responsible for their financial future. While regulators are doing their job, it’s time for investors to recognize the importance of the right advisor.

Know who you are dealing with, understand their qualifications, and be aware of conflicts of interest. It might seem like you’re not paying for advice, but free advice often leads to addiction and indirect costs that become apparent later.

Platforms facilitate transactions but don’t take responsibility for your losses. If you’re dealing with a mutual fund distributor (MFD) or a stock broker, ensure they are experienced and qualified. Ask about their investment philosophy and how they stay updated with the latest information.

If you follow a financial influencer, or finfluencer, on social media, remember that this relationship is more about general recommendations than professional one-on-one advice. Understand the basis of their statements. Employees of large institutions or brokers must also meet experience and qualification standards to advise investors.

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Finally, remember that the term “Investment Adviser” is restricted by Sebi. Only individuals or corporates registered with Sebi can use this title. If someone approaches you claiming to be an advisor, verify their credentials on the Sebi website.

Manikaran Singal is principal officer at Good Moneying Wealth Planners Pvt ltd, a Sebi-registered investment adviser.