Choosing and buying financial services NEVER TRUST A STRANGER


by Mr. Dhirendra Kumar,

Those who have a positive attitude towards what life brings them are more likely to be successful and happy. 

Or at least, that's the general opinion. Of course, when you meet someone new, it's better to assume the best about them, since most people are honest and sincere. 
Generally, things work out better if your default attitude is open and trusting.

Unfortunately, this is not true when choosing and buying financial services. As a rule, you should assume that everyone who is trying to sell any financial service to you is either hiding something or is actively lying. This may only be true 90% to 95% of the time, but it's better to assume the worst to protect yourself.

In order to make the right choices when you save, invest and buy insurance, you must educate yourself independently, and make your decisions yourself, without having to depend on what a salesperson is telling you.

Decades of interacting with the customers of financial services and observing how these industries work has left me with the strong belief that when it comes to dealing with them, distrust and suspicion should be the default attitude.

Why is this the case? Why is buying financial services different from buying, say a jacket, a pair of shoes, or a car? There are many reasons for this and while some are to do with specific issues with the way business and regulations are conducted in India, there is a much deeper reason that is fundamental to financial services.

 Mr. Dhirendra Kumar,

This reason is that the input, product and output of a financial service business is all the same stuff money, and the only way they can earn more is by ensuring you get less of it. 

Think about that carefully. Let's say you are trying to decide on which midsize car to buy. There are choices at a wide variety of price points. You could buy one from Tata Motors for Rs. 7 lakh, or Maruti for Rs. 9 lakh, or from Honda from Rs. 13 lakh, or from Mercedes at Rs. 45 lakh. 

So is everyone except Tata overcharging? Not quite.

The deal is quite transparent. You will give an auto company a certain amount of money, in exchange for which, you will get some combination of performance, reliability, safety, gadgetry, prestige and whatever else you are looking for in a car. 

You pay money, and you get these things in return. If a car company wants to make more money, it can enhance the attributes that you value and charge more.

This has a really important implication: for a certain type of financial service, and a given competence with which it is run, the only way for the provider to make more money is to give you less of it. If the provider wants more of anything, whether it's profit or salaries for employees, or more dividends for the owners, it has to be eked out by reducing what you get. 

If they want to increase sales by paying more commissions to agents, that too is paid for by reducing your returns. Everything comes out of your pocket.

Do not think of this as some esoteric, conceptual model of financial services. This is what drives every interaction you have with your bank, insurance company, stockbroker, mutual fund, and anyone else trying to sell you their services.

Do not count on regulators to protect you either. 

In general, India's financial regulators are always well behind the curve in terms of stopping the malpractices that are rife in all these products.

The only way to stay protected is to educate yourself with knowledge and data that is not tainted by actually being generated by the same people. 

Always be suspicious of anyone who is selling a financial product, and let distrust be your default attitude. I know it sounds terrible, but that's the way things are.


No comments: