There is this doctor in our vicinity who is quite respected and is very good at diagnosis. He shuns home visits, though that means more money. His clinic is full at all times, with patients having to wait an hour before the doctor sees them. This doctor understands that he is in a profession and does everything good for the patient. If a patient does not require a pathological test, he will never recommend one. He is doing well and is worshipped by his patients.
However, since the past three years, this doctor has expanded. Today, he has become a one-stop shop for health. He has bought a larger clinic and tied up with a pathology company, where they perform diagnostic and pathology tests. He has developed in-house capabilities to take X-rays and cardiograms. He has got a department for physiotherapy. Not to miss out on anything, he also sells certain small medical products such as dura bands, etc. A good profession where you really require the trust of people has been turned into a business. When that happens, one does what is good for the business, rather than the patient. Now, how many would trust him when he recommends a blood test or a cardiogram or an X-ray? A professional has turned into a businessman, in the name of growth and expansion.
So is the case with financial markets. Stock broking, money management and financial advisories are all professions. When people go to them, the best advice is expected. However, even these professions have turned into business. The goal is to sell to clients at any cost. A new business model emerges. Sales and marketing takes precedence over the right advice. Client acquisition and sales targets become benchmarks.
See how the stock broking industry has evolved into a business. Competition led to falling brokerage rates and now, you have certain companies offering a lump sum brokerage for trading as much as one wants. The job of a professional stock broker is to help the client make wise investment decisions, and not speculate. But when one becomes a businessman, he/she encourages clients to do exactly the opposite of what the profession demands. The more a client trades and speculates, the more he/she loses and the more the profits for the broker. Institutionalisation of stock broking has led to the entry of companies and banks trying to boost the speculative traits of investors. Investment advisors have been replaced by salesmen.
Take the case of the investment management industry. Devoid of competition and controlled by a few, the industry works on the push model, supported by huge advertising budgets. Bands of salesmen, burdened with stiff targets, are not averse to generating sales in any manner possible. Fund houses dole out freebies to intermediaries, who in turn sell confusing and conflicting products to the ignorant investor. The targets are to achieve more funds under management and better relative returns. Very few have a good performance record to justify the assets entrusted to them. They do enjoy the trust of the investors because they follow the pull model a professional would follow.
Big banks, companies and financial institutions want to be in any business they can lay their hands on. Unfortunately, they get preference because of their size and money power. The problem is that our society shows preference for the big rather than the good. People get carried away by big names rather than the right professionals. High net-worth means high integrity and credibility. It also signifies better advertising capability and, thus, more visibility. Inversely, a competent professional because of lack of financial muscle is seen as unreliable and untrustworthy.
More From This Section
In such a situation, what does an investor do? Follow your common sense. Does one go to a barber to stitch clothes or to a tailor for a haircut? Go to a bank for your banking needs and go to an investment professional for your investment needs. Don’t be carried away by size and advertisements. Advertised goods are seldom good. Learn to distinguish between a salesman and a professional. There are no short cuts in life. Avoid instant gratification and quick-rich ideas. If you are greedy, there is always someone to exploit your greed.
The writer is chairman,Parag Parikh Financial Advisory Services
