Climbing Trees & The Benefit to Cost Ratio

 

One of the most abundant trees once upon a time in Bangalore as in many other cities across the south used to be the Coconut tree. Thanks to the fact that literally every part of it is useful, the tree is also called a Kalpavrisksha. Growth of city has meant a rise in number of trees being cut down to save on space though even today it’s not un-usual to find such trees in almost any old area across the town.  In fact, at my place we have one that has been yielding fruits for decades.

While most trees can be easily climbed, this is not the case with the Coconut Tree. With a single straight stem and no real grips along the way other than for the groves formed by leaves that have long since gone, climbing requires a certain kind of skill-set.

A coconut tree climber today charges 300 – 400 per tree for a single climb. When I was young, I used to climb trees and yet, never have I tried to climb a coconut tree to pluck the fruits. The risk of falling is just too great for the savings it affords.

Manoj Nagpal tweeted the following story yesterday which seems to imply that investors who try to save pennies by going direct take much bigger risks.

My First Twitter Short Story
Folk Tale of Kerala: Swamy and Coconut Tree
Are u Swamy trying to buy Direct Mutual Funds? pic.twitter.com/lb6fgd5gVn

— Nagpal Manoj (@NagpalManoj) August 2, 2017

While I disagree with the premise of the story (the guy who climbs the tree himself is not a Direct Mutual Fund Investor, rather he is an Entrepreneur who takes the risk of plucking what he assumes are low lying fruits), it’s true that if you aren’t knowledgeable about finance, it’s better to have an advisor to guide.

In the United States, almost all states now include personal finance in their K–12 standards. Of course, on the other hand household debt is hitting new peaks showcasing that education while helpful isn’t enough to stop us from taking stupid decisions.

In India, I don’t think any school offers classes on how to manage finances. How many students passing out of colleges I wonder can really differentiate between Fixed Deposit and Recurring Deposit let alone the difference between CAGR and XIRR.

A booming stock market along with aggressive marketing by AMFI has meant strong inflows into Mutual Funds. Much of the inflow into Equity funds come in through Distributors who are paid for both brining the client by way of Upfront commission but also are paid through the length of the time the client remains on-board by way of trailing commission.

It is no one’s argument that we don’t need advisors. Most clients require advice on how to organize their investments better. But does that require one to pay a fee in perpetuity regardless of whether advice given has been continuous in nature or was a one off?

For a long period of time, Stock Brokers also doubled up as Advisors given the lack of any other decent alternative. This also meant that pricing was high with investors being charged as a percentage of their investments.

But passage of time has meant that there now exist professional stock advisors who will for a fixed fee guide you on the opportunities that are available. Once a stock broker is reduced to just being an executor, the fee started to fall to the extent that a few discount broker’s today offer to execute your orders without taking a paisa in commission.

Flat Fee based advisory hasn’t really taken off anywhere across the world. The blame though lies on our cognitive biases than regulatory hurdles.

The Power of “Free”

Almost every distributor claims that his services are for free versus the fee based advisor who asks you to upfront a certain sum of money before he would even initiate the process of helping you invest in the right asset classes.

While most of us presume that nothing comes free and there is always a catch, we justify the ignorance by assuming that nothing is anyway being paid out of my pocket. The distributor is anyways compensated by the fund house, so why should I bother.

In a bull market, fees hardly matter given the returns the fund could deliver. But when you are saving for causes such as your Retirement or your children’s education that is a couple of decades away, this small difference can really add up over time.

But the biggest reason for one to either choose a Fee based Advisor or Do it yourself is not just to save money.

“The great thing about reading is that it broadens your life”  ― George R.R. Martin

While we spend our whole lives trying to earn more, isn’t it also important to learn how to deploy the same better. Mistakes happen regardless of whether it’s a decision taken by you or a decision taken by someone you paid. But while you can always learn from your mistakes, the same cannot be really said when the mistake was committed by someone else but impacted you. You then become Collateral Damage.

While we fear that we may stumble, as Alfred Pennyworth says to Bruce Wayne (Batman) – Why do we fall sir? So that we can learn to pick ourselves up.  Your Distributor would love for you to be uninformed for the more uninformed you are, lesser the chances of asking tough questions.

Start with simple concepts and soon you shall find that it’s not all that tough and those complex sounding jargon aren’t really as complex as it seemed from the outside. Even if you were to take the help of an advisor, wouldn’t it be important for you to understand whether he is helping you or helping himself?

To conclude, it all boils down to whether you will take want to take responsibility for the choices you make or hope someone makes the choices for you. And No, Investing in Mutual Funds isn’t a full time job that you would rather outsource.

“The only real mistake is the one from which we learn nothing.”

~John Powell~