Financial Products And The Myth Of ‘The Chosen One’

With apologies to the 2002 book by K Sohail which has the same title and delves into the psychology of serial killers. That connection, of course, is totally incidental.

A large section of salaried individuals is used to seeing their savings bank account balances tend towards zero by the end of the month. Around the third week, if they get a call informing them that they are eligible for a one-click personal loan, or that their name has come up for an exclusive credit card limit enhancement, how do you think they would feel? You have to admit that even the most intelligent among us get lured by these so-called ‘exclusive offers’, tailor-made, only for us.

One would imagine that things are different with the rich – the high net-worth individuals. After all, in most cases, they are already really exclusive – members of a club, owners of a particular brand of cars, wearers of a brand of suit – surely, they wouldn’t be impressed with such silly pitches.

You will be surprised to know that when it comes to positioning of financial products, the ‘exclusivity clause’, those golden words – “we are reaching out to a ‘select group’ of families” almost always works!

Add another layer of ‘sophistication’ and things get even more exciting.

As if, the product creators—to whom the client is just part of a ‘list’—are well- wishers.

HNIs need to ask three important questions:

1. Why Am I Being Approached Directly?

I know that many advisors do not make the mark when it comes to giving gainful financial advice, but at the very least, they would have had years of assessing the client’s risk profile, attitudes, net-worth, family complexities etc. In addition, they would have recommended many such products, and would be aware of the competence of the fund management group and other important details. What is the interest in getting rid of them? Is it possible that this group of advisors would prove to be an impediment? Would they ask more questions? Demand more fees?

They are always compensated from the fees that clients pay. Then why this move?

2. What Does ‘Sophisticated’ Mean After All? Am I Really Sophisticated?

The dictionary defines sophisticated as (of a person) being able to understand difficult or complicated ideas. In the past, whenever regulators have determined that a product is not easy to understand and hence, is not suitable for retail investors, they have gone ahead and increased the threshold of minimum investments. This is as if the richer one is the more one is capable of understanding complex products. Is that really true?

3. What Does ‘Difficulty’ Or ‘Complexity’ Have To Do With Making Money?

People all over the world have begun to bust the myth that complicated = higher returns. “It is not necessary to do extraordinary things to get extraordinary results” – Warren Buffett has famously remarked. Maybe you should take heed?

Some new-age writers like Morgan Housel are putting data out there to establish the beauty and the longevity of simple ideas. Good old asset allocation and periodic rebalancing seems to be the key to making wealth.

Perhaps, one may like to look at the performance of these products after they have been introduced in individual portfolios.

There are three issues with that:

• HNI products are mostly privately-placed. Even when distributors are involved, getting hold of investor communication isn’t easy - Investigative financial journalists will vouch for the same.
• If the distributors are eliminated, the performance updates will not be available for public scrutiny. What are the chances of anything getting widespread coverage in case something goes horribly wrong with this no-distributor approach?
• If there is no intermediary, HNIs will now have no one to blame except themselves. What does that do to their wish to complain to the Regulator, not to mention the inertia to complain.

In spite of all the warning signals, people will buy into such products. How can they be blamed? Here is current environment:

• The debate about not being able to create alpha over benchmarks is beginning to gather steam in India. As a response, all sorts of people, may I add, all sorts of ‘erudite’ people are presenting all sorts of data rubbishing the indexing trend and making cases for anything from humans to algorithms ruining the state of markets.
• The economy is not doing well, that is evident from all indicators.
• The markets are ‘polarised’, meaning only a few stocks are rewarding investors. Making money is not going to be easy going forward – most say and you would tend to agree.

In the midst of this chaos and uncertainty, one has received communication from some unheard of, but SEBI-registered, portfolio manager with his ‘exclusive offer’ advertising fantastic past performance. Surely it merits a look.

If you are an HNI and such a pitch has landed in your inbox, check if any of the following are true. And if they are, you will know what to do:

• The presentation made, is not so much about ‘how’ they will deliver astounding returns but is showcasing past returns – captured on the trading desk’s own money.
• The corpus managed so far is small – maybe a hundred or couple of hundred crores.
• Some ‘proprietary’ (read, impossible to understand) trading tools were used.
• Some extraordinary results were achieved. You may have received a CAGR. Most likely, returns are extraordinary in the first or second year and petered out later.
• The creators of these awesome, not-known-to-others skills are now floating a fund for a select group of families.
• “You” are the chosen one – those spine-chilling words which I have grown to be wary of.

What is possible to do on a small corpus of proprietary money, for some length of time, is almost impossible to replicate on large portfolios of public money. There are enough and more examples of hedge funds worldwide, and here is an excerpt from an article in the Financial Times: “Small funds with aggressive strategies would do well for a while, appear at the top of published rankings for recent performance, receive a flood of money, and then badly underperform”.

HNIs are obviously smart, after all they have made all the money but the money has been made by sheer expertise in their own business. But they may not always be equipped to understand the shenanigans of financial product manufacturers.

On top of that, meeting manufacturers directly may not be the best idea. NYU Stern Professor Scott Galloway recently wrote about this in a recent blogpost – ‘Intimacy = Contact’.

One can only implore that these investors seek advice from people who are in the know. The rest of course, is the chosen ones’ fate.

Abaneeta Chakraborty has close to two decades of experience in managing money for ultra-HNI families. She founded the firm Abanwill Consultants LLP in 2017 to provide independent views on investing.

The views expressed here are those of the author and do not necessarily represent the views of BloombergQuint or its editorial team.