Around March this year (and even last year), few relatives called me up to ask whether they should invest in financial products X or Y or Z among many others…
X = Traditional Endowment & Moneyback plans by insurance companies
Z = ULIPs
On enquiring about their sudden interest, almost all of them confessed that their insurance agents, mutual fund distributors and bank relationship managers were pursuing them.
My response to them was mostly to avoid these XYZ products.
But a few days back, I came to know that many of them went ahead and put money in the Xs and the Ys and the Zs. Almost in all cases, the agents (literally) promised earth-shattering returns or I don’t know, maybe paradise! That too with decent safety of original investments!
Now, who would say no to such offers?
And therefore, my relatives invested put their money in XYZ.
This is not uncommon. You might have seen people making such money moves all the time. Maybe you too are doing it.
But what makes this interesting is that people chose to believe in a lot of things without much thought.
For reasons that are best known to them, people are willing to accept explanations of agents and advisors at their face value. No questions asked. Even if they ask questions, they are not the right ones.
If an agent is telling you that an MF will deliver 20% year on year for the next several years, wouldn’t it make sense for the agent himself to take a loan and invest in it? It sounds stupid but if the agent believes it’s so sure-shot, then why not? Put the money where your mouth is…
That is what we need to be aware of.
Our incentive lies in earning high returns. That is what we want to hear. And agents oblige us by telling us just that. 😉
Want 20% annual average returns? Sure. Take it…
Their (agent)’s incentive lies in selling as many policies and funds that he/she can. Their income (commission) depends on it. The higher the number of policies they sell, the more they earn. Most of them have targets to achieve before the end of the financial year in March and hence, the Tsunami-like push to sell savings+investment products with amazing promises during that time.
And that’s the lesson I think we need to remember.
We need to understand the incentives for the person on the other side of the table. Why does he really want you to buy something from him? Think about it.
I remember a quote that seems quite applicable here:
“The rabbit runs faster than the fox, because the rabbit is running for his life while the fox is only running for his dinner.” – R. Dawkins
In the financial world, maybe these agents are Rabbits (need income/commission to run their house) whereas you are the Fox (in search of dinner = higher returns). Not a perfect analogy but workable. 😉
But to be fair, not all those who are selling your financial products are bad. J Even with the misaligned incentives, they genuinely try to be concerned about investor’s interests.
One big example of the power of incentives in India can be seen in the mutual fund space itself.
The fund that offers the highest commission to the distributors will be pushed the maximum for sale by the MF sellers. It’s quite obvious. Distributors want to earn more commissions. Plain and simple.
Another example is the sale of life insurance policies. Traditional policies are bull**** for even moderately intelligent investors. Even then, these are the most popular products.
Why? Lack of knowledge + Sales push by agents.
Result? As years pass by, buyers become disappointed with the results over time. But by then, it’s too late.
So what to do?
I like what Shane Parrish of Farnam Street Blog says:
The behaviour you see is usually the result of incentives you don’t see.
We need to understand that incentives are very powerful. And even professionals (who have taken the oath to be unbiased) will try to push the boundaries to maximize their financial benefits.
As investors, it’s our responsibility to find out the motives and incentives of the people we are dealing with. We need to be a little skeptical and consider all ‘great claims’ with a pinch of salt. We can only see a situation with true clarity when we carefully consider the interests at hand.
It’s not easy, but it’s necessary.