By Dhirendra Kumar When one meets someone new, its better to assume the best about them since most people are honest and sincere. Things work out better if your default attitude is open and trusting. Unfortunately, this is not a safe attitude when buying financial services. As a rule, you should assume that anyone trying to sell a financial service is either hiding something or actively misrepresenting something. This may be only 90-95% true but its better to assume the worst.

Why is buying financial services different from buying, say a jacket or shoes or a car? There are many reasons for this and while some are to do with specific issues with the way business and regulations are conducted in India, there is a much deeper reason that is fundamental to financial services.

Whats fundamentally different about financial services is that the input, product and output of the business is all the same stuffmoney. Literally, the only way they can earn more is by ensuring you get less of it. Think about this carefully. Lets say you want to buy a midsize car. There are choices at various price points. You could buy one from Tata Motors for Rs 8 lakh, or Maruti for Rs 10 lakh, or from Honda at Rs 15 lakh, or from Mercedes at Rs 50 lakh. So is everyone except Tata Motors overcharging? Not really.

For each of these companies, the deal is transparent and clear. You will give an auto company some money and in exchange you get some combination of performance, reliability, safety, gadgetry, prestige and whatever else you look for in a car. If a car company wants to make more money, then it can enhance the attributes that customers value and charge more.

Thats not the way it works in financial services because the only thing thats going around is money. You give money, the provider spends money to create the product, but the product itself is more money, some of which you get back. Some of your money is kept back for expenses, profits, sellers commissions etc. Therefore, unlike cars or jackets or mobile phones or anything else, financial services are a zero sum game.

This has a serious implication which customers generally dont understand. For a given type of financial service, and a given competence with which it is run, the only way the provider can make more money is to give you less of it. If the provider wants more of anything, be it profits or salaries for employees, or more dividends for the owners, then that has to come from reducing what you get. If it wants to increase sales by paying more commissions to agents then that too is paid for by reducing your returns. Everything comes out of your pocket.

This is not a theoretical model of financial services. This drives every interaction you have with your bank, insurer, stockbroker, mutual fund and those trying to sell you their services. And dont count on regulators to protect you. In general, Indias financial regulators are always well behind the curve in stopping malpractices in these products.

The only way to make the right choices when you save, invest and insure yourself is to arm yourself with knowledge and make decisions yourselves without depending on a salesperson. Decades of interacting with customers of financial services and observing these industries has led me to believe that when dealing with them, distrust and suspicion should be your default attitude.

(The author is CEO, Value Research)

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Why you should not trust anyone when you invest - Economic Times