At the time of zeroing in on an investment advisor, investors often get carried away with the testimonials given on the websites of investment advisors. It’s not uncommon for an advisor to claim that one of his clients managed to earn a whopping (say) 30 percent return on the investment made, while another one could grow his investment (say) by two times over a period of time.
While being clueless of the authenticity of such ludicrous claims, some naïve and gullible investors may fall into the trap laid by such investment advisors (IAs).
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Capital markets regulator Securities Exchange Board of India (Sebi) recently cracked down on one such investment advisor (IA) who ran a firm called ‘Monetary Solutions’ and imposed a penalty of ₹25 lakh for a number of offences including the sharing of fake testimonials and reviews of other investors.
The role of an investment adviser is crucial to the development of the securities market, especially for the entry of the small investors who may rely on the advice of such IAs, Sebi’s adjudicating officer notes.
So, it is vital that every investment advisor takes all necessary steps to comply with all the provisions, rules and regulations as laid down by the regulator
Testimonials: For adverts only?
In the above-mentioned case, one satisfied client claimed that the services of ‘Monetary Solutions’ are nice and was quoted as saying: “Good service. Nice dealing. Experienced licenced financial advisor helping me to trade. I am doing an average of 25 lakhs business per day with them and I am fully satisfied. Worthy for money services.”
When asked to provide the details of the clients whose reviews were mentioned, the investment advisor, said: “Testimonials being shown on the website of monetary solution investment advisor are only for advertisement purpose and they are not our clients and are fake testimonials..”
Besides testimonials, the accused investment advisor also mentioned its 45 past tips and the status of all of its tips which was shown as success and the corresponding profit accrued by those tips ranged between ₹1,000 and ₹30,000.
Misleading questions
Investment advisors are also supposed to show the complete picture of markets which entails a range of risks. Deliberately tempting investors to opt for the high-risk investments amounts to misleading them.
As per the Code of Conduct for investment advisors as specified under the Third Schedule, questions should be fair, clear and not misleading, and questionnaire should not be vague and should not contain leading questions, Sebi’s adjudicating officer Barnali Mukherjee said in her order.
In the above-mentioned case, investors were induced into opting for high-risk investments by asking misleading questions.
These questions included the following:
Q1: Would you invest where a small return is earned associated with small risk instead of a high return associated with high risk?
Q2: When market is not performing well would you like to invest in more risky investment instead of less risky investment to earn high return?
The investigation observed that such questions were framed to make the clients fall in the high-risk category so that they are able to sell services to such clients because the advisor does not provide any service to an investor who falls in the low-risk appetite category.
Sebi’s adjudicating officer Barnali Mukherjee imposed penalty amounting to ₹18 lakh (under section 15EB) and ₹7 lakh (under section 15HA of Sebi Act) which totals to ₹25 lakh on the said investment advisor for failing in fiduciary duties owed to its clients.
The officer also concluded that the rules and regulations which investment advisors are meant to follow are supposed to deter wrong doing and to promote ethical conduct in the securities market.
