Trust, but verify

In financial transactions, the mantra is: "trust, but verify".

Read my article here



The English translation is as under:

The other day, I was talking to an investment advisor. He was very excited about the trust he has won from his clients. He claimed that he was so much trusted by his clients that they give him signed demat account slips and mutual fund transaction forms.

I asked if the client would ever give blank signed cheques to the same advisor. He laughed it off. Nobody in one’s right mind would ever give blank cheques.

So often, people consider this argument of comparing blank cheques with signed demat slips as ridiculous and laugh it off. While giving someone a blank cheque is accepted as a huge risk, giving a blank signed demat slip is not.

So let us understand what all can happen if you give signed blank demat slip to someone. You are letting the person fill in the details without your knowledge, yet legally you have approved whatever he writes on the slip. This “whatever” means that he can transfer the securities from your demat account to his personal account or anybody else’s account. If it comes to your notice, one can argue that it was just a mistake and he can return the securities in your account.

One has also come across cases where the investor lets the securities remain in the broker’s pool account. When the investor was suggested not to do so, he came up with arguments: (i) it is convenient; (ii) he wanted to avoid the transfer charges. The convenience argument also appeared in case of giving signed but blank demat transaction slips.

So often, we seek to avoid minor inconveniences and fall in a major trap.

In both the above cases, one is offering an opportunity to someone to defraud. Are we suggesting that you should not trust anyone? Well, we cannot. It is one’s choice to decide whom to trust and whom not to. However, we would only like to ask one question, “What is the priority – safety or convenience?” And then to what extent do we want to compromise one for the other?

This is not just about demat accounts. There have been many instances of defrauding innocent investors by conmen. Some have collected cash from investors for depositing in the post office schemes. The amount never reached the post office.

Majority of the frauds have this pattern in common. It all starts with convenience and the same is given the name of trust. Convenience is the primary objective. The conman pretends to be trustworthy and sells the convenience part. He keeps both the decisions and custody of assets with him. The custody is kept in form of the transaction slips in the above example. If someone has the authority to take decisions and also controls the transaction related documents, it becomes easy to commit fraud.

Trusting someone is not bad, as we have already mentioned earlier. However, once convenience becomes a habit, it takes a painful experience to once again get trust on priority.

Mutual funds are a bit different. When redemption is filed in a mutual fund scheme, the proceeds would only go to the investor’s bank account registered with the mutual fund folio. Mutual funds have built this safety mechanism in place and hence they do not issue cheques to third party.

For all other investment avenues, please insist on transfer of all the money only through the banking channel. Else deal through mutual funds, which do not accept cash beyond Rs. 20,000 and always pay the redemption proceeds and dividends in the registered bank accounts.

An investor would be better off being objective in deciding the trust v/s convenience equation. It is better to decide whom to trust and why. Even after that, it is good to take stock of the situation once in a while. Blind trust may not always be desirable. The mantra to remember should be, “Trust, but verify”.

Wish you a very happy 2016!

-        Amit Trivedi

The author runs Karmayog Knowledge Academy. Recently, Amit has authored a book titled “Riding the Roller Coaster – Lessons from Financial Market Cycles We Repeatedly Forget”. The views expressed are his personal opinions.