In 2007, I had recommended a few of my clients to invest in small cap closed end funds. Markets were in a frenzy and small caps were outdoing large caps by a wide margin. So there was a lot of investor interest in these schemes as investors were lured by their astronomical returns. Also, these funds were offering higher upfront commissions. I made a mistake by advising my clients to invest in such schemes. The schemes failed miserably and clients were naturally unhappy.
From this experience I learned that I should not get swayed by returns. Now I do thorough research on funds before recommending them to clients. “I put myself in clients’ shoes and ascertain if I would invest my own money in the funds I recommend,” says Alagappan.
One of my clients wanted to invest in a structured real estate product. When she sought our advice, we apprised her of the risks involved in this product which was liquidity. However, the client was very keen in investing in this product despite the fact that we had alerted her about the risks involved in the product.
The client went ahead and invested in the fund after researching the fund for one month. It had a seven-year lock in. As feared by me, the fund took a little longer to pay back money. After 10 years, the fund has paid only around 30% of the principal. “While I still manage this client’s portfolio, the client harbors a feeling that she would have generated more returns if the money had been invested somewhere else,” says Zankhana.
While I can’t call it was my mistake since I had cautioned the client about the risk, I learned that I should have documented this advice. I learned that giving verbal advice can create misunderstanding in the future and it is best if we document our advice with clients’ signature. Also, I learned that we should not go beyond our domain expertise to please the client.