I would urge people to get hold of a copy of a book called Brandwashed. It is written by Martin Lindstrom, a marketing consultant of international repute, who has been consulted by many leading companies in the world. In this book, he talks about how needs are created by corporations who use everything from guile, sex, psychology, behavioural analytics, etc, to sell more.
After reading the book, I started wondering. We are up in arms against the mutual fund industry for a variety of reasons (from poor performance to high expenses) but we do not bat an eyelid before spending money on bottles of colas or something like Red Bull (a pick-me-up drink that is supposed to contain over six teaspoons of sugar and lots of caffeine, apart from other things!). Or we spend a fortune on buying an iPhone without analysing whether the functions that we really need and use can be performed by a far cheaper instrument. Today, marketers have taken over our mind, body and soul. Compared with the selling of these created desires, mutual fund or insurance salesmen seem like saints.
The sales force behind hundreds of products we use are motivated to make us part with our money by the producer through innovative pitching of blatant lies in advertisements, sales commissions and other enticements. None of these is regulated. We don’t mind when someone who sells chocolates or a bath soap makes a margin of 50%, but we fight for a few basis points when it comes to financial products. We don’t protest when Apple makes profits that are more than the cost of making the iPhone!
In the case of financial products, we fight because there is too much transparency and what we pay for is not a consumable or a durable product. In the case of consumer products, we never see or expect to see the money coming back in any form. In the case of financial products, apart from seeing our money back, there are varying expectations and calculations regarding returns. So, we have many views and references on what to expect, what is acceptable, what is not, etc. In all our consumption-driven spending, there is no such measure.
If an expensive shirt turns out to be a bad one, we may never buy the same brand again. We, however, do not take a similar attitude to financial products that are sold or even bought. If we buy a share, based on either our own research or a close friend’s recommendation, we keep quiet if the idea tanks and we lose most of our money. Human behaviour is different for consumer and financial products.
Unfortunately, regulators of financial products are not aware of these issues and are constantly changing regulations which confuse investors and do more harm than good. When mutual funds were sold with entry-loads, I was amongst the first to raise the issue that when a customer chooses his own fund, based on his own decision, there should be no load. That was pushed through by the Securities and Exchange Board of India (SEBI). However, SEBI’s next move to abolish all entry-loads was stupid. It simply killed the industry—in the name of protecting the customer.
While insurance is being sold, based on celebrity endorsement, high commissions, high level of expenses, SEBI thought it fit to go after the mutual fund industry. That was simply because there was no reasoned defence from the industry. The Association of Mutual Funds of India (AMFI) was effectively controlled by a couple of large fund houses, who thought that this move by SEBI would improve their profitability. And most big boys had their own distribution channels. Small fund houses have no option but to either close down or sell out. Fidelity has quit, partly because of their huge overheads and mainly because they felt that the regulator would not let the industry grow. I am sure that a few more will do the same. Most mutual funds are on a cost-cutting spree.
Unlike insurance, which has been around for more than 50 years thanks to the Life Insurance Corporation of India, mutual funds are new. They have not done badly. Half the funds have delivered better than their benchmark returns. You hardly see any claims from the market-linked investment products of the insurance industry (ULIPs) about their performance. That surely tells you the story. No publication analyses the past performance of ULIP products in terms of net returns to customers. Comprehensive information on performance is not even available. The regulator does not make it mandatory to give actual returns since inception. But mutual fund performance is dissected every day by multiple experts. The comparisons have become so ridiculous that for equity products we are shown ‘daily’ or ‘weekly’ returns! Clearly, the odds against the mutual fund industry are very stiff.
This shows that the customer will be sold only those products that harm his wealth. Otherwise, why should regulators clamp down on the selling or distribution of a product, in the name of doing good for the customer? It sometimes feels that the insurance and the banking industry are behind these moves to choke the mutual fund industry. The Insurance Regulatory and Development Authority (IRDA) goes all out to protect its turf and AMFI just exists to serve the short-term interests of a couple of large players. And it is scary that SEBI thinks that AMFI should become a self regulatory organisation!
Mutual funds do not have a pull factor as yet. They also do not have the emotional blackmail content of insurance products and they lack the speculative thrill of direct equities. They are like the dull dogs which do their job faithfully (for the most part at least) and, unless they are promoted, we will miss a vital investment avenue. Instead, we are kicking the dog.
In sum, we will live with outright lies when it comes to consumer products. We will gladly suffer an assault on our health. We will waste money on useless products that are positioned to trick us into thinking that we cannot live without them. But, when it comes to the only genuine platform available for the average saver to access the wealth-creation system called the stock markets, we want to put it through the most stringent test of hygiene. It would be nice if we were a bit forbearing with the mutual fund industry.