The UPA government thought that passing a bill meant that the job was done. So stupid and so foolish. They passed bills which said “Right to Employment” and “Right to Food” – completely irrelevant if you cannot create enough jobs and reach the food to the people who need it.

The USA is nothing different. They keep passing ‘Fiduciary’ bills – Barrack Obama wants it to be a part of his legacy. The amount of cheating that happens in USA even with SEC around is not funny.

The combination of a client having irrational expectations and a stupid, gutless, adviser ensures that portfolios either under perform the index, or get very poor return for the amount of risk that they take. A few portfolios have got pulled over the finishing line by some high risk share like Deccan Gold or Kaveri seeds, and the adviser and the client are both proud about that! They have no answer to a simple question? “What if Deccan Gold had dropped 20% in a day”. High Beta and super high Beta. What a combination!!

That said, surely, while a fiduciary standard (or code of conduct by the advisor bodies) should help to make the financial advice industry more accountable, it will only work indirectly to partially reduce  the biggest issue consumers face in this area — the overall competence of the financial advice business.

When you meet people in the financial advice business and ask them some pointed questions, you realize that many of them work without written mandates. That is fine, as long as you bring your own experience in asking questions and finding the right products. Both are missing.

  • Clients have a regular expectation of 40% returns and Advisers ‘tone’ it down to about 20% – because this is the so called ‘long term average’ from stocks over the past 37 years.
  • Advisers have chased performance and words like standard deviation, and regression to the mean have no meaning at all.
  • “Will invest only in funds with a 19% cagr over a 10 year period with a low standard deviation” is a stated mandate for a corporate investor. Amused.
  • Of course, more opaque “investment” choices all too frequently make the same out-sized claims with similar and predictable results. Hdfc Life has redeemed products with sub savings bank account returns over a 10 year period.
  • Most poor returns can be traced to a high and expensive charges including adviser fees

Much of the money management business (aka BFSI)  has been an abject failure pretty much across the board. Real estate and gold have been poor performers too especially at the investor level. Poor investor behavior (irrational as expected) makes that dreadful performance even worse — consumers (I refuse to call them investors)  trade too often, at the wrong times,  and into the wrong instruments. Futures and Options can be sold by anybody to anybody! Most consumers chase returns via managers, sectors, trades that have been hot, only to be disappointed when mean reversion inevitably sets in. And now the investment adviser / financial planner adds his nice big round fees. Indexing would have got a better return. The consumers of financial products’ expectations make matters worse still, because investors expect out performance as a matter of right, fund choice, and IFAs, investment managers, and the media tell them to expect it, implicitly and explicitly. There are some DIY sites which could be termed humorous if it were not dealing with such an important part of the client’s life. A DIY investor (even with a good track record) is not the most competent person to be advising.

Luckily for the IFA, the mutual funds SIP stand out like virtuous parts of a sin industry. The ULIP stands out as the bad cousin – and do remember, the whole life insurance industry depends on mis-selling.

You do not really expect there to be a legislation that will help, right?


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