“When a customer enters my store, forget me. He is king”- John Wanamaker
“The customer is always right” - Harry Gordon Selfridge
These two pioneering quotes just set the context for this article. Now, in personal finance:
-Has the customer been treated like a King by businesses?
-Is the customer always right or is it just a myth?
The answer unfortunately, to both the questions, is NO! Let’s take a look at them.
The customer is king!
The right product has been used for the wrong purpose
Our forefathers have looked at life insurance as the primary method of formal investments. Life insurance is the perfect product for the protection of the family. When it comes to investments, it is very expensive and inefficient. But even today, life insurance continues to be a more popular form of investment compared to mutual funds. As per insurance regulator IRDAI’s website, the total assets under management (AUM) of life insurance companies is more than Rs 39 lakh crore as of March-end. For the mutual fund industry, it is around Rs 32 lakh crore as per industry data released. Higher commission in insurance is the primary culprit. Most insurance agents do not suggest the right product to the King – term insurance!
Conflict of interest & distributors
The ‘Mutual Funds Sahi Hai’ campaign has made them a household name. However, distributors of mutual funds are compensated by the asset management company. More often than not, they suggest a fund because it has higher commissions than for its merits to the King– this is the conflict. The regulator, SEBI, has taken the right steps in this direction through the investment advisory regulations. The investment advisor is conflict-free, as the King is the one paying the advisor – leading to the most suitable advice!
The asset manager should not be an asset gatherer
Bull runs after bull runs we have seen ample number of New Fund Offerings (NFOs). Sometimes the King is offered infrastructure funds and in the next bull-run, everyone offers ESG and in the one after ‘Pre IPOs’ become the mantra. When you speak to an honest to God fund manager privately, she will tell you that the existing fund schemes are more than sufficiently covering the full market spectrum for investors. That is why SEBI has categorised funds and restricted new offerings to a reasonable extent. But it is the distributors and the advisors who need to do the right thing. Offer something that’s truly missing from the portfolios.
The customer is always right!
Economic and market theories assume that a customer is a rational person who acts in one’s best interest. But investors (customers) are often swayed by external and non-relevant considerations. In today’s connected world, there is an information overflow. Every new thing (ESG, bitcoin, NFT) appears as an attractive investment opportunity. Add to those other distractions - what’s being done by peers, what is the new theme of investment, IPOs, etc. etc.
The volatility in the market also leads to irrational decisions like reducing equity allocation near the bottom or increasing allocation closer to the peak.
Long-term wealth creation requires one to follow very simple, basic & boring rules, but consistently, over a long period of time. Maintain asset allocation, choose the right instruments, avoid direct equity investments (unless you are an expert fund manager) and reduce costs to the extent possible. The rules are simple but adhering to them religiously is tough.
Investors are right in investing for their future but they go wrong in getting distracted. It is the advisor’s responsibility to ensure that they are always on the right path.
Being financially aware and financially safe should be the primary objective of investors, when it comes to their own finances. Following some basic rules may help in achieving it.
Look for an advisor who has no conflict of interest: The advisor should earn from you and not from mutual funds. This is the starting point but it decides which path you follow.
Make a plan else you are planning to fail: Have specific goals in your financial plans and ensure your advisor accounts for all them when planning your investments.
Use the product for its true purpose: e.g., insurance is for protection only, so opt for term insurance.
Secure your family’s future: Take adequate health and term insurance. Ensure all bank accounts are in joint name with your spouse and nominations are in place in all accounts, investments and insurances.
Do not get swayed: Do not focus on the glamour and the information overflow. Stay focused on your goals – it may be boring but it will pay off in the long term. IPOs / NFOs / Bitcoins will come and go!
Ask questions: Keep asking questions to your advisor and invest only when you are convinced.
Woah! It’s really tiresome. But remember, being boring is much better than having an ‘unsafe’ future.