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The problem of trust and distrust

There's a conflict of interest at the heart of financial services which makes it necessary for you to default to distrust and suspicion of all providers

The problem of trust and distrust

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It's a truism that those who have a positive attitude towards what life brings them are more likely to be successful and happy. When one meets someone new, it's better to assume the best about them since most people are honest and sincere. Generally, things will work out better if your default attitude is open and trusting.

Unfortunately, this is not a safe attitude while 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 misrepresenting something. This may be only 90 or 95 per cent true, but it's better to assume the worst to protect yourself. The only way to make the right choices when you save, invest and insure yourself is to educate yourself independently, and make your decisions yourselves without having to depend at all 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.

The question is, why is buying financial services different from buying, say a jacket or 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.

What's fundamentally different about financial services is that the input, product and output of the business is all the same stuff - money. Literally, the only way they can earn more is by ensuring you get less of it. Think about this carefully. Let's say you are trying to decide on which mid-size car to buy. There are choices at a wide variety of price points. You could buy one from Tata Motors for Rs 8 lakh, or Maruti for Rs 10 lakh, or from Honda for Rs 15 lakh, or from Mercedes at Rs 50 lakh. So is everyone except Tata Motors overcharging? Not really.

For each of these companies, the deal is transparent and clear. You will give an auto company a certain amount of money. In exchange you will get some combination of performance, reliability, safety, gadgetry, prestige and whatever else you look for in a car. You give money, and you get these other things in exchange. And if a car company wants to make more money, then it can enhance the attributes customers value and and expect from it and charge more and/or sell more cars.

But that's not the way it works in financial services because the only thing that's going around is money. You give money, the provider spends money to create the product, but the product itself is more money, some of which you get back. Some of your money is kept back for expenses, profits, sellers' commissions, etc. Therefore, unlike cars or jackets or mobile phones or anything else, financial services are a zero sum game.

This has a serious implication which customers generally don't understand. For a given type of financial service, and a given competence with which it is run, the only way the provider can make more money is to give you less of it. If the provider wants more of anything, be it profits or salaries for employees, or more dividends for the owners, then that has to come from reducing what you get. If it wants to increase sales by paying more commissions to agents then that too is paid for by reducing your returns. EVERYTHING comes out of your pocket.

Don't imagine that this is some theoretical model of financial services. This is what drives every interaction you have with your bank, insurance company, stockbroker, mutual fund, and those who are trying to sell you their services. And don't count on regulators to protect you. In general, India's financial regulators are always well behind the curve in stopping the malpractices that are rife in all these products.

The only way to protect yourself is to educate yourself with information and knowledge that is not tainted by actually being generated by the same people, and to always be suspicious of everyone who is selling a financial product, and have distrust as your default posture. I know it sounds terrible, but that's the way things are.