06 December, 2010

Helping friends doesn't add to your wealth

Seek professional help for investment advice

Money plays an important role in people’s lives. Yet, when one has it, it is seldom given the importance it deserves. People look forward to earning more money rather than managing the money that they already have. This is probably why, money in bank accounts, is not deployed for an extended period of time. People don’t realise they are missing an opportunity to earn profits on them.

The money lies around till they hear about some good investment or insurance ideas from friends and family. Many of us have friends and relatives working in the financial services sectors, who approach us for business. More often than not, they get both attention and business from us. While putting one’s money into any of the “amazing schemes” that one hears, most don’t really care to understand what the scheme means, what the risks involved are, how the scheme works and so on. The reason for this carefree attitude is the blind faith one has in their friends or relatives. Everyone likes to believe, our friends and relatives will do the best for us.

This is a classic problem that we all face today. Most times, our relative or friend has just joined the insurance or finance business. When a person is stepping into a new business, he or she is desperately looking for business. They have to sell the products they have taken up. They are looking for support from their friends and relatives. A newcomer typically spends the first six to twelve months, tapping this ready market of his close ones. Even companies hiring agents are betting on making initial business from the newbie’s inner circle.

As supportive relatives and friends, most people succumb to such proposals even though at a loss. A person may take an insurance policy with a premium of Rs 15,000 per annum, just to please their relative. Later, when they find the product unsuitable to their needs, they still stick to it. You cannot walk out on your relative or friend. If it is a traditional product, they had bought before the new insurance regime, they will have to pay the premium for three years before surrendering. After having spent Rs 45,000 for three years, all they may get is Rs 15,000. That's a lot of money to lose simply because you cannot say ‘no’ to your relative or friend. The money lost is with the insurance company. The relative has probably made Rs 4,000- 5,000 from what has been paid in three years.

Relatives and friends may not be selling what is good for the person - they may be pushing what they have to sell. A person from insurance will sell insurance policies to you, whether you require insurance or not. There are other problems too. When you invest in a financial product, you require proper servicing, over the tenure of the product. A newbie, especially those who plan to take up the job on a part time basis, may not be in the system after a year. In insurance, the drop-out rates are very high. Even when a person does not drop out, if he does not conduct his business seriously, it will impact the service levels. What’s worse, since this person is known, he cannot be taken to task.

When it comes to investing money, it makes sense to choose advisors who can help by giving out the right information and can be pulled up in case they don’t perform. One must have the freedom to change one’s advisor if need be. After all, it is a good amount of money at stake. Do give relatives and friends some business, but only if, they are able to stand scrutiny. Else, one should think of other ways to help them but it is best to keep one’s money with professionals. Mixing money and personal relationships can bring more problems than pleasure.

Published in Business Standard on 10/10/2010

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