In the previous post, we explored how wealthy investors are often lured into complex and exclusive financial products that promise superior outcomes. The truth is, many of these products underperform simpler investments while charging significantly higher fees. This is not just a theoretical problem—it’s a very real issue, happening today with major wealth institutions. Two such examples are XXGM and NP (names changed but you should be able to figure these out).

Both firms have built strong reputations in India’s financial landscape. They cater to high-net-worth individuals (HNIs) and promise bespoke financial services tailored to the needs of the wealthy. But beneath the surface, there’s a growing trend of mis-selling proprietary products, portfolio management services (PMS), and alternative investments. These are pitched as sophisticated solutions for the affluent, but in many cases, they offer little more than higher costs, greater complexity, and unnecessary risk.

The Shift Away from Mutual Funds

One of the more troubling developments is XXGM’s approach to moving investors out of mutual funds and into more complex products. Mutual funds, especially diversified funds, have long been considered a prudent investment option for most investors. They offer diversification, professional management, and lower fees than many alternatives. More importantly, they are transparent, and investors can clearly understand what they’re buying into.

Yet, XXGM has been actively encouraging its high-net-worth clients to move out of mutual funds and into proprietary products. Why? It’s not hard to figure out. The firm makes significantly more money when it can sell its own products, especially those that come with higher management fees and performance-based charges.

The narrative is familiar: investors are told that mutual funds are for the masses. They are led to believe that their wealth makes them “different,” and that they need special products to meet their unique needs. But this narrative is more about increasing profits for the firm than it is about improving outcomes for the investor.

The Pitfalls of Proprietary Products

Proprietary products are financial instruments created and managed by the same firm selling them. In theory, there’s nothing inherently wrong with proprietary products, but in practice, they often serve the interests of the firm more than the client. These products can be opaque, with layers of complexity that make it difficult for investors to truly understand what they’re buying. And because these products are not offered to retail investors, there is often less regulatory oversight.

For instance, many of the proprietary products being pushed by XXGM and NP are heavily marketed on their potential for higher returns. But these potential returns come with significant risk, much of which is not clearly communicated to investors.

The truth is many after taking substantially higher risk deliver substantially lower returns. The fees are also substantially higher than those associated with mutual funds. When you combine high fees with the risk of underperformance, the result is often disappointing for the investor, but highly lucrative for the firm.

PMS: A Mixed Bag for Investors

Portfolio Management Services (PMS) are another product category heavily sold to high-net-worth investors. PMS offers a more personalized investment approach than mutual funds, where the portfolio is tailored to the client’s specific needs and risk tolerance. While this sounds appealing, the reality is often far less rosy.

PMS is marketed as a premium service for discerning investors. But again, the focus tends to be more on exclusivity than effectiveness. PMS accounts usually come with high entry barriers—often requiring a higher investment—and high fees, which can include both management fees and performance fees. It’s difficult for investors to truly gauge whether their portfolio is performing well or whether it’s simply designed to benefit the firm managing it.

In many cases, PMS accounts underperform even basic mutual funds. The reason is simple: most PMS portfolios are concentrated in 12-15 stocks. If a few stocks underperform, there is absolutely no place to hide for these portfolio managers. Not just this, after fees, taxes, and other charges are accounted for, the net return to the investor is often less than what could have been achieved through a simpler, more transparent investment approach.

The Allure of Alternative Investments

Alternative investments—such as private equity, venture capital, hedge funds, and real estate investment trusts (REITs)—are another area where the wealthy are targeted. These investments are sold as exclusive opportunities that promise high returns not available to the average investor. They are often marketed as the secret sauce that will help wealthy individuals grow their capital faster than traditional investments.

But the risks of alternative investments are often downplayed. These products are highly illiquid, meaning investors can’t easily access their money when they need it. They are also more speculative, with a higher probability of loss. And, like PMS and proprietary products, they come with hefty fees that erode returns over time.

In many cases, investors don’t fully understand the risks they’re taking on. The allure of exclusivity clouds their judgment. They are led to believe that because they are wealthy, they should have access to these special opportunities. But what they’re really getting is a high-risk, high-fee product that benefits the firm more than it benefits them.

The Ethics of Mis-selling

At its core, the issue of mis-selling comes down to ethics. Firms such as XXGM and NP are supposed to act in the best interests of their clients. They have a duty to provide services and products that are suitable for their client’s needs, risk tolerance, and financial goals.

But when firms prioritize their own profits over client outcomes, that duty is compromised. Encouraging clients to move out of simple, effective products like mutual funds and into complex, high-fee proprietary products is not acting in the client’s best interest. It’s acting in the firm’s interest.

The challenge for investors is recognizing when they’re being sold something that benefits the firm more than it benefits them. Unfortunately, this is not always easy to spot. Financial products can be complex, and firms use sophisticated marketing strategies to make them sound appealing. But wealthy investors need to ask themselves tough questions before making any investment decision: Who benefits from this product? Do I fully understand the risks? Is there a simpler, more cost-effective alternative that can achieve the same goal?

A Call for Transparency and Simplicity

The antidote to this problem is transparency and simplicity. Investors need to demand greater transparency from their financial professionals and the firms they work with. They should insist on understanding not just how a product works, but also how much it costs and what risks are involved. Simplicity should be valued over exclusivity. The best investment strategies are often the simplest: diversified and aligned with long-term goals.

Mutual funds are examples of simple, effective investment vehicles that can meet the needs of most high-net-worth investors. They are transparent, regulated, and have lower fees than the complex products being pushed by many firms. More importantly, they allow investors to keep more of their returns, instead of losing a significant portion to fees and charges.

Don’t Fall for the Illusion of Special

Wealthy investors are often told they need something special. They’re sold on the idea that their wealth makes them different and that they should have access to exclusive products not available to the average investor. But in many cases, these exclusive products are more about enriching the firm than improving the investor’s financial outcome.

The lesson is simple: Don’t fall for the illusion of special treatment. The best investment strategies are often the simplest. Complexity does not equal better results. In fact, it often leads to worse outcomes. Wealthy investors should focus on transparency, simplicity, and long-term goals. Only then can they avoid the costly mistake of being taken for a ride by those selling them something they don’t need.

Let firms like XXGM and NP play their games with complexity and exclusivity. As a smart investor, you don’t need to play along. Stick to strategies that work and avoid those that are designed to benefit the seller more than the buyer.