INSUBCONTINENT EXCLUSIVE:
Last week, I wrote about the annual Buffett and Munger show from Omaha, Nebraska
However, as one would expect in a six-hour QA from the two, that was hardly enough to cover the stream of wisdom and fascinating
observations found at the event
One part I found relevant to the state of financial products in India was Buffett talking about the power of bad incentives
damages the personal finances of savers than encounters with salespeople who have been incentivised in a certain way
what a salesman will do is just awful, if you give a man a family to support, in the commission system
And he had two adopted children
the adopted daughter, he just churned the old guy until he was broke
in personal finance arises from malpractices driven by the system of selling on commission
you can be sure there are going to be a lot of transactions
misalignment of the interests of the customer and the salespeople
People will follow their own economic interest
In almost every financial product, the customer (or saver or investors) benefits when the product delivers over a long period while the
salesperson benefits from the act of selling itself
Indian mutual funds are now an exception to this.
Map this on to any personal finance service of the kind that Munger talks about
Every time you buy a new investment, a commission is generated
In services like stock broking, the same is true of selling
The best scenario for the saver is to find a good long-term investment and stay invested
This leads to the highest returns and lowest taxation
However, this is also the worst scenario for the intermediary because there are minimal transactions
This is a stunning mismatch of economic incentives
client.
Well, not necessarily, because the seller can be good enough to worry about the long-term well-being and loyalty of the customer
about a decade of tinkering, Sebi has evolved an incentives structure for Indian mutual funds which is immune to these problems
Still, investors who understand the power of incentives can do enough to save themselves.