Trusting financial Intermediaries

In response to a tweet of mine, Anupam Gupta (b50) tweeted this

@Moneylifers @Prashanth_Krish such huge distrust in the entire financial distribution chain, including MFs? any reason?

— Anupam Gupta (@b50) May 22, 2015

They key question is, should we trust those who claim to work on our behalf while having a business model that goes against that very logic.

Lets start of with the much hated Stock Broker. A stock broker was one who in earlier days allowed persons to buy & sell securities for a small commission. The commissions which were huge in those days steadily has crept downwards with advent of technology and more competitors.

Its general knowledge that its very tough (will not say impossible since there will always be guys who claim to make a living out of it) to make money trading the markets, especially on the intra-day time frame. Yet, almost all big brokers send daily flush of SMS calls asking their clients  to Buy ABC, Short ZYX and so on and so forth.

How many brokers have you come across who shall say, well, the way to wealth generation is not by trading but by buying and holding shares of good companies over a long period of time (I kind of disagree with my own statement out here, but I hope you get the point). How many brokers advise you to just do a SIP on Nifty Bees since the probability is high that the returns you generate by doing that is way bigger than what you can achieve on your own.

On the other hand, I come across statements such as, Invest only that money in the markets that you can afford to lose. Its no wonder that people invest a Lakh in stocks and goes out and invests a Crore in Real Estate. Worst case, he knows that the land is his no matter what happens.

For the not so sophisticated investors, there is another way to get into markets – Mutual Funds. But just like most financial products, even this needs to be Sold. So, the mutual fund distributor also becomes a kind of Financial Advisor.

A financial advisor generally makes his money by charging a X% of fees on the total assets he manages. But since most of us would not want to pay from our pocket, the advisor instead advises on funds where he gets the biggest commission. And since tail commissions are low, lets churn the portfolio every time there is a new fund offering. After all, buying at 10 is cheaper than buying a fund with a NAV of 100, Right?

In India, Insurance is not seen as a hedge but as a way to save (Invest). Its no wonder then that most Insurance Advisors (agents really) advise one against buying Term life policies and instead go for Endowment / ULIP plans where the commission paid is much higher. Even after accounting for the risk coverage, the return is so low that is makes zero sense, but hey, I get back my money here seems to be the logic.

And finally we have the Financial Advisors who claim to help you trade / invest in markets for a small monthly / quaterly fee. What I find amazing about these guys is that all of them want you to pay up in advance regardless of the results. Not a single guy says, Here is the way I do business. I advise you on what to Buy / Sell for X months. If you feel the advise is worth it, pay me XX so that I continue for the next Y months, else, no worry.

Nope, every one of them wants you to trust them with your money while not trusting you for one second. Do you really think they work for your benefit?

And finally, Portfolio Management Schemes. I have tweeted on it quite a number of times and every time i look at those numbers, I wonder who would want to invest in a product that under performs all the time. Most PMS model is build upon generating brokerage. If, and that is a big IF, they do end up making some money, they want a cut of it as well.

Almost all models in the financial sphere is out there to get a cut of your savings. There are of course, many honorable guys out there who do business which is worth for both the client and himself. But they are so far and so tiny, that you rarely hear about them, let alone learn more about them.

As the saying goes, “There ain’t no such thing as a free lunch”

We spend our lives trying to save every rupee we can, but what use is it, if we allow ourselves to stumble upon when the it comes to making the money earn for us.