Protect your money, somehow

Anand Kumar

"The first principle is that you must not fool yourself—and you are the easiest person to fool."

This statement was made by the renowned physicist Richard Feynman in a speech at Caltech in 1974. Although he was referring specifically to the realm of science and the work of scientists, the essence of this message applies broadly to any discipline that involves research and analysis. This includes investment research, regardless of whether it is conducted professionally or personally.

In investing, the problem is made far worse because there are generally others who are trying to encourage people to fool themselves. In fact, it's an entire industry now and the impact is wide enough for the regulator to start bringing its guns to bear upon it. I'm referring, of course, to the so-called finfluencer problem.

However, this problem is completely different from a regulatory or policy point of view and from an individual investor's point of view. From the regulatory point of view, the problem is that anyone giving advice should be regulated. However, that's not really what the individual investor cares about. We have all faced really bad and shamelessly self-serving advice and mis-spelling from regulated intermediaries. It does not matter to the investor whether such a person has a certificate or a piece of paper. To someone at the receiving end, whether bad advice is from a YouTube finfluencer or bank 'relationship' manager, it does the same damage. So, as a practical matter, let us ignore the fiction that regulated entities do not give bad advice. If you and I work out a methodology for recognising and ignoring bad advice, it will serve us equally well no matter who is giving it out. It's like that proverb about teaching someone to fish.

This redefines the problem as one of investor education or, as it's sometimes called, financial literacy. It is undoubtedly true that it's not possible to protect investors who don't have the knowledge and the willingness to be protected. This means that most people need basic financial literacy, and it's generally assumed that this literacy takes the form of knowing what to do with money. This involves teaching how the investment world works, what the different types of investments are, who they are useful for, how to fit them into your financial needs and so on. This is all good stuff, and investors must learn it. However, this is not where people go seriously wrong.

Where they go wrong is when someone tries to hawk bad financial products dressed up as good ones, and the victims cannot recognise what is being done. And if you are in the market for financial products, then sooner rather than later, someone does exactly that - this is not an exception but a 100 per cent rule. Sooner or later, EVERYONE is subject to being sold harmful financial products. So it would be far more useful for people to learn what not to do with their money. This kind of financial literacy is generally not available anywhere. In fact, it has to be learned by bitter experience.

I'll give you a recent example I came across. A friend gets calls from his bank 'account manager' who keeps asking him to invest in mutual funds directly from the bank. The salesman tells my friend that he must have heard that investing directly is advantageous so here's an opportunity to invest directly from his bank account. When my friend asks this guy whether the investment is in direct plans of mutual funds, he never gets a straight yes/no reply. Basically, the salesman uses the word 'directly' a lot in the normal English sense of the word but avoids saying direct plans. I'm sure you can see what is going on here. High-cost non-direct funds are being pitched but somehow, some variation of the word 'direct' features in almost every sentence.

What's more, I am almost certain that this trick must be commonly used and salespeople are careful to say nothing that is technically false or actionable. However, the entire sales pitch is quite dishonest and even fraudulent in spirit. Many of the YouTube 'finfluencers' are actually like innocent children compared to these tricksters.

So what do you think? What kind of investor education will help you against such tricks?

Suggested read: How to protect yourself from financial influencers?