Beware of ripoffs

Everyone does financial mistakes, some large some small.

The personal finance industry is designed to chase you for your money, for obvious reasons. The people working in this industry has to make a living and profit. Nothing wrong with it, however there are some unscrupulous greedy professionals and companies who will siphon off your money before you realize what happened.

I too have been a victim of such tactics, where that sinking feeling is unavoidable once you realize you have been swindled. You vacillate between blaming yourself for being careless to simply justifying as how would I know.

I have made other stupid mistakes many times, thankfully most of them were small.

Here are 2 big ones which I will remember throughout my life, and hopefully draw some lessons not to repeat the same.

Insurance masquerading as investment

In 2005, when I started my journey of personal finance (I was earning for 8 years with no savings/investment), I decided to open an investment account with one of the big international banks in India. They had what was called a “Wealth Management” division that would help me all the way in opening an account to choosing my investments. What a convenience! I just had to commit a specific amount to be invested by a certain time, either through a lump sum or regular investment.

So I met with what they call a Relationship Manager. The lady came to my home to advise me, suggested some good mutual funds (I later researched they were decent performing ones) and setup an investment account. I was thrilled and excited to start my first investment, and then came the unsuspecting pitch.

She told me investments in mutual funds are risky, so alongside I should also invest in something very stable with tax-free and better returns than a CD. Diversification, Tax-free and stability all sounded perfect music to my ears, and I resonated to her plan. What followed next was I signed up for a so called U.L.I.P (Unit Linked Insurance Plan or Cash value life insurance).

So far so good, only couple of years later I inquired about the fund value or the surrender charges. By this time, I started reading about charges and commissions on financial products. To my utter disbelief, the product I signed up for (which seemed perfect then) had a special charge of 60% of my first year’s premium. They called it the Premium Allocation Charge. Wow!! Why would you charge to allocate my money? and 60%?

Even robbery at gunpoint would have sounded harmless in comparison. 🙂

That was my first big ripoff, I eventually bailed out of it few years later by minimizing my loss. In the subsequent years, the I.R.D.A (Insurance Regulatory and Development Authority of India) realized this dishonest practice by insurance companies and their agents, and reduced the charges to more like 4-6% and now it is clearly documented in brochures and illustrations.

Lesson: Do not mix investments with insurance. Insurance companies have no edge over low cost mutual funds. If there is a guarantee of principal, the returns are paltry and most of the profits are distributed to their agents. For insurance, term plan has no better substitute.

Fact check: In later years, I came across a relative who was selling such products. He told me agents who perform well are rewarded with paid for vacations to destinations in Europe. No wonder where 60% of my first premium went. 

Real estate bought wrong

Real estate is a high return, high risk product. Even when you are buying a home, you have to be knowledgeable in every step of the process, guard yourself against potential rip-offs. Everyone you come into contact is trying to make big bucks (and very quickly) in that industry.

My share of stupidity in this area is huge.

I bought my second home (condo) in India from a new builder, but who was also very well known to me. His claim to fame was honest communication, promised execution, good discounted price and quality of construction. The deal was really a good one, from both price and quality.

As things progressed (the development cycle was for 3 years), I became confident and  upgraded to a bigger sized condo. As the earlier one was not delivered, it was an arrangement to switch the contract to the new one and I would be paying the difference.

It was like upgrading to business class from the economy class, by paying the fare difference. Except that it was not such a smooth ride. 

The blunder I did was not to insist in a new contract being signed immediately and the title of holding the new condo to be defined. Since the builder was known to me personally, I somehow gave the benefit of trust and waited patiently for him to switch the contract. Meanwhile as the payment system demanded from his office, I continued making the scheduled payments up to almost 90% of all dues.

A year down the line, things went south for this builder and I realized that something is wrong. On digging further, it came out that the new condo was not approved in the building plan and cannot have a regular title yet. Just to clarify, there is no Title insurance or Title company in India. Usually the transactions are directly between buyer and seller (or builder) with an optional broker mediating in between.

It took me the next couple of years to untangle the mess, and I lost a huge amount of money and mental peace in getting the title legitimized.

Lesson: Know the process and only thing you trust is the paperwork. Do not take any verbal assurances. In the above incident, I had only myself to blame for the stupidity. 

Fact check: I later came to know it was a deliberate lie (while selling the unit to me and in my follow-ups) by the person (builder) I knew very closely for years. Trust no one. 

So those are the two biggest financial suicides I signed up for.

crime scene do not cross signage
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