For most IFAs the life insurance is not a problem – they have one agency and that is the product that they sell. However, in case of mutual funds they have a choice of 43 fund houses and 10 more are in the pipeline wanting to start operations. So each fund house falls over itself to please the IFA (top end at least).

The crucial question is: Should IFA accept gifts from AMCs? 

It’s the annual ritual in which companies say “thank you” to the people on the other side of their trades, to clients, to journalists. Bloggers like me are still not on that list, but I do not go to the meets  of all the mutual funds. I have no clue what happens there.

No one seems to be bothered by the gifting culture. Especially, when the gifts are small.

You should be. There is overwhelming evidence that small gifts have an overwhelming impact on the decision making process. Even mugs, writing pads, mouse pads, mouse, pen drives, – gifts to which we do not pay much attention have a great impact. In fact one of the most stingy mutual fund proudly told me once that they are the best in gifting to their agents. They did it across all the IFA.

According to the leading behavioral economist, Ulrike Malmendier of the University of California, Berkeley, finds that “small gifts may [create] a stronger reciprocal effect than large gifts,” making the recipients feel even more indebted to the giver. “Thus, not only might size limits be ineffective in reducing the influence of gift giving…they may even be counterproductive.” (the research paper is available free online).

Well it starts like this. You believe it is all right for you to accept gifts. So you accept a small gift – and their research proves that this starts influencing the thinking of the product selector. So if your RM in the bank has a Standard Chartered Mutual fund’s mouse pad, the chances of it being ‘undue influence’ is very high. Ditto for an IFA.

Most important thing is once you take a gift and believe it does not impair your judgement, you are now more willing to take bigger and bigger gifts. There is enough research in the US among doctors and IFA how these gifts over time break you completely and make you a gift accepting, less straight adviser. But psychologists that free food, in and of itself, makes people favorably inclined toward information that came from the same source as the food. How could it not? Is this why your mother said ‘do not be friends with the wrong people?’ – if you were friends with them, ate with them, shook hands with them – there was a scare that you would become one among them. Food was a great way to lure people for the caveman. It still is.

I am sure that Financial Planners / IFA would feel outraged that doctors accept gifts like pens, pads, lunch, dinner, vacations, from pharma companies, but they do not feel compromised when it comes to their own self. One common way how they are obliged of course is when ‘associations’ formed by professionals are ‘helped’ to conduct their meetings. Of course there is no quid pro quo.

I know IFAs will pooh pooh if I said that a lousy diary, a trip to Goa, a lunch / dinner or some booze will impact IFA decisions in fund selection. However given familiarity bias, media bias, influence, ‘you cannot be blamed for buying an IBM syndrome’, relationship bias – all these put together surely influence investor longevity in older funds. For e.g. an IFA may be more forgiving of a Hdfc fund than he would be of a Quantum, Motilal Oswal or Parag Parekh Finanacial Advisory’s funds. It is estimated that the gifts by the mutual fund industry in the USA is more than US $ 5 million. Lets face it, they are not exactly doing charity – and this may be coming out of the NAV itself 🙂 (that is another story!!).

more to come…later perhaps…

 

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