The power of incentive is so strong that even the best in the field gets trapped. Let’s start with a simple yet popular slogan these days “mutual funds sahi hai”. You must be wondering, if Sachin and Mahi promoting mutual fund investment, it must be right only.
Well, their incentive to promote mutual fund investment is because AMFI pays them a fee.
You want to grow your wealth, but you don’t know where to start.
There are so many mutual funds and a handful worth looking at, you get confused. You take advice from the first available person, say your banker.
Your banker is incentivised for any sales he/she does on financial products. You will be lucky to be sold a below-average mutual fund, often the incentives are more for bankers to sell insurance products or structured products.
Even if your banker is an ethical person, he/she may not be able to take a fair stand. For example, in an upward-moving market, a lot of good funds will look like average. Your banker will have a hard time convincing you to allocate to good schemes but have current ‘average’ performance.
He/she will save time (incentive) and recommend a top-rated scheme with high performance but in a few months, this scheme will become an underperformer. In a bull run, the worst fund managers are often celebrated. Even you will be more convinced with top-rated fund managers due to the comfort of not thinking (incentive) too much.
After a few months, you will realize that your banker is incentivised and is not recommending anything for your benefit. You will look out for a personal financial advisor. Interestingly, even for a financial advisor, the incentive to take a contrarian stand may be tough.
Just imagine, it is courageous to recommend investors to allocate when the markets are falling. Similarly, it is not good business sense to discourage more investments when the markets are overheated. An ethical financial advisor will do just that.
If you have an incentive to grow your wealth, you will educate yourself with the tools including how to evaluate management, financial advisors, investment products etc. You will then appreciate investment professionals who can make contrarian decisions.
Often the incentives of people involved in a certain sector increase when the sector is overheated. Infrastructure funds were launched in 2007/08, but the return is still negative. Post covid, manufacturing funds and real estate-focused investments are being launched.
It is much easier for the fund houses to launch hot themes. They don’t have to push for the sales, it will sell on its own. Just give a high incentive to the distributor, the launch will be massively successful for the fund house.
However, the experience of investors may not be pleasant. Financial advisors or distributors should be saying for these schemes ‘ye mutual fund sahi nahi hai’.
People with misaligned incentives will be quite nice to talk to especially when they have to sell something or source something from you. You need to switch on your System 2 thinking and figure out the incentive.
We are surrounded by people with misaligned incentives. Right from a celebrity trying to sell a fairness cream to an investment product to things that we don’t need.
Incentives are not just restricted to money but spread to all aspects of human life. You reflect and you decide for yourself.