A few checks that will help raise red flags when investment products are recklessly thrown at you.

Intelligent, hardworking, mature, respectable, professionally successful and handsomely rich is what we all want to be. These are also reasonably accurate descriptions of the victims of the recent 'wealth-management' fraud allegedly committed in Gurgaon. I would like to add some more adjectives to this list. How about sloppy, gullible, careless, unrealistic, greedy and irresponsible? Because this is actually the description that fits some of their actions (and those of so many of us who are but a little luckier than them).

Let me hasten to add that I am not sufficiently in the know about what exactly has happened in this particular instance. But incidents like this serve as wakeup calls for those of us who are financially indolent. I guess it's time to make a laundry list of some essential questions we should be asking our wealth managers. We should do this well before we entrust a fat fraction of our hardearned wealth to them, I may add. This is not an exhaustive list that can absolutely cover all situations for you, but it will certainly help you raise the right flags when wealth management 'pitches' are recklessly waved at you. And thereby reduce the chances that you get duped into an unfair or fraudulent transaction.

The first question that you should raise is obvious, to the point of sounding silly: "What are you going to invest my money in?" But ask, nevertheless, and see the range of replies you can get. Your money might be going to (one or more of ) the following investment (or asset) classes-listed stocks, unlisted stocks, stock futures, stock options, corporate bonds, government bonds, call money market instruments, real estate, commodity futures or funds managed by people other than your money manager (which might include mutual funds, index funds, bond funds, liquid funds, etc). Ask the person managing your wealth for his views on each asset class. If he is investing your money in more than one such asset class, ask for details on what will guide the mix, and why. If the answer is ambiguous or complicated, you could be heading for trouble.

If the person selling you the investment scheme 'selectively' highlights returns (and ignores or underplays risks) while describing these asset classes, get ready to pop Question 2: "Ok, I get what you are investing in, but tell me what can go wrong, and how bad can it get?" Ask for historical returns dating back to a little more than what is offered, and ask for the worst year (not just the best) in terms of annual return in the asset class that is being sold to you. Even this is a historical figure. Surely, there's nothing to guarantee that things can't get worse? By now, you are clearly driving the conversation. Onto question 3: "By the way, what are you going to charge me for this service?" Any profit-share is to be frowned on in principle. No matter what the definition, a profit-share induces the wealth manager to chase returns and, in many cases, to neglect risk. Remember, it is the job of the wealth manager to earn you a profit, while protecting you from risks, not just be an action-oriented cowboy or casino-hopper with your money. Does he take a serious fee cut if profits fall below a threshold? The good news is that most wealth managers now use 'high-watermarking' in profitshare which simply means that no profitshare is charged on profits that 'make up' for previously incurred losses. Check for this. Meanwhile, lots of complicated fine print has been written in contracts about profit-share or 'carry', enough to puzzle most people, so it's best to avoid any kind of profit-sharing nowadays.

Question 4 is actually more important than Q3: "Can I take my money back? Unconditionally?" This is actually a stress test; you really don't want to withdraw after entering the sweepstakes. But what if you change your mind? Is there a penalty, delay or any other restrictive condition that makes withdrawal more unpleasant than it should be? After all it's yourmoney, so why should you be penalised for taking it back? Finally, question 5 is a sanity check that most victims of fraud (of the investmentmanagement type) forget to do: "How often, and in what level of detail, will you tell me what's happening to my money?" You could also add a crucial corollary: "Will it all be in a format that I can understand, and can I spend as much time clarifying the dense stuff, as you are spending today in selling it to me?"

Source: http://epaper.timesofindia.com/