Responsibility, duties and Commission

There is a old saying that says “never ask a barber if he thinks you need a haircut”since its in his financial interest that you not only get a haircut but maybe a head massage as well. A Real Estate agent (even one appointed by you for your best interest) would try to close the deal even if waiting a bit more time would have given you a better deal since his interest lies in his ability to collect his commission once the deal was signed. In fact, in the book Freakonomics – A Rogue Economist, the Author digs into public information to show how when it comes to selling their own houses, Real Estate agents manage to get a better deal that what they could get for their clients.

Where-ever there is fees, there is bound to be a conflict of interest, especially when such fees accrue only if the transaction is through. As a stock broker, I tried to dissuade my clients from trading intra-day showcasing large amount of evidence that the probability of them making money on a consistent basis was lower than what they tend to believe. But all I got for that nice gesture was attrition of the said clients to other brokers who told them what they wanted to believe.

In India, Mutual Fund distributors as a lot earn hundreds (a couple of thousands perhaps) of crores per year (info available publicly) for selling funds to their clients. Biggest earners are banks since a Bank is a place where we place our trust (after all, we are trusting them with our hard earned money, right?) and would not be in a position to understand whether the relationship manager has our interest in his mind or his monthly target.

If you aren’t sure if its his interest in mind or yours, all you need to do the next time you are approached with a irresistible proposal is ask him if you could invest “Direct”. The answer will be all you need to know about his conflict on interest and hence the bias.

The other day, I came across a database which provided data on how much of their commission was from funds that was sold by their own Asset Management Company. A leading public sector bank had 100% of its Income selling funds that was from their own AMC. Do you really think the bank clients got the right information on what funds were available to invest?

Sometime back, I was discussing with a friend of mine as to whether it made sense to start a enterprise where we sold mutual funds for a fee (not the trailing commission). My friend dismissed the idea right away saying that Indian’s love to get things free (or supposedly free) and this idea would go nowhere (other than maybe emptying our pockets of what we had). I do hope he was wrong and since there has been new launches of financial websites offering similar services (Invezda for one) does give me hope that maybe, just maybe he was wrong.

If I recommend something (and it maybe as small as buying a book), I have a inherent fiduciary duty to ensure that I am not selling something that is not worthwhile for you. When Mutual fund distributors say that any day is a good day to start investing, they are looking at you as a piece of meat rather than hoping that your growth will provide them with earnings over a longer period of time.

Of course, it would be unfair to tar the whole segment since there will be a lot many who have your interest at heart and will not lie to you just to make sure the deal goes through. The only way to differentiate them would be for you to ask the right questions (and hopefully know the answers as well) to really know whose interest he really has in mind. Even better would be going to a fee based advisor since his Income will not be dependent on whether you invest or not.

A year back, my father who had gone to the bank to make a Fixed Deposit (Tax Saving) was sold a ULIP which guaranteed him a 4% return (when FD rates were nearly 9%). Guess what, my father was actually happy with the deal (of course, he had no clue that final yield was  measly 4%). Thanks to me raising a stink on Twitter, the reversal was affected and my father went and made a fixed deposit with a different bank. But if not for me, he would have felt that the seller was looking at his benefit when it reality he was most probably just trying to complete his monthly quota.

Do remember that there is no “FREE MONEY” anywhere. Once you completely accept that, you will know what questions to ask and understand what the underlying risk and rewards are. Once again, let me emphasize, its your money everyone is after and its for you to ensure that you take the maximum possible care of it.