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Advised to Create Panic

Investors need to try & understand why a certain kind of advice is given to them before acting upon it

Investment decisions made out of panic or fear never do any good. This is being brought home to a lot of investors as they survey the impact of the financial crisis on their investments. Unfortunately, as in every crisis, there are those who seek to profit from spreading fear, uncertainty and doubt. Recently, I came across an amazing story of how the mutual fund distribution wing of a large global financial services outfit is deliberately spreading misinformation for the purpose of making its clients transact needlessly and generate more brokerage income for itself.

In this case, the distributor advised its client—which is a fairly large company—to pull out its money from a particular FMP fund and deploy it elsewhere. Remarkably, at the point when this was done, the FMP was due for redemption in a matter of days and the redemption crisis for funds was long past. The advice was manifestly harmful for the client because the fund carried a substantial exit load. Had the investing company waited for a few more days it would have been able to redeem at full value. However, the fund distribution organisation advised the investor that it should pull out just to be on the safe side.

I believe that there's a lot of 'just to be on the safe side' sort of advice floating around nowadays, and as in the above case, some of it is actually harmful to the investor. Moreover, the underlying problem is not limited to similar cases. You don't have to be a corporate investor with FMP investments getting advice from a large fund distributor in order to get bad advice. At every level of financial and investment advice, there are a certain proportion of those whose advice is actually anti-advice. This is a side-effect of getting your financial advice from the same person or entity through which you are conducting your transactions.

While trying to get a sense of what kind of advise is being meted out during the financial crisis, I realised that not all the wrong advice is being given out to earn extra brokerage. Some of it is also intended just try and be a hero to the client, basically to generate activity that gives the impression that activity is needed to protect the investors' money.

In fact, I think the corporate example is more in that class. Over the last year or so, practically every investment service provider, be it a stockbroker or a fund distributor has been instrumental in their clients losing a lot of money. This is not necessarily the advise-givers' fault. Till some months ago if anyone gave conservative, safety-first advice, investors would either consider him a fool or just ignore him. I know this first-hand because this used to happen to me a lot. However, since I just write and speak in the media, people ignoring my conservative advice doesn't matter to me. Those who were in the business of selling financial products simply had to be aggressive because the whole atmosphere was like that.

Now, many of them are trying to redeem themselves by giving a lot of advice that sounds safety-first, as in the above example. However, it amounts to generating activity by getting people to pull out of investments that are actually perfectly fine. There are a lot negatives in the business and investment environment today, but that doesn't mean that there are only negatives.

In times like these, it's important to be calm and unpanicked and yet try and see why you are being given the kind of advice that you are being given.