Not everybody understands conflict of interest. Let me give you some examples.

Many of us would have screamed ourselves hoarse that “term insurance is the way to go”. I am sure you have heard me, Amit Trivedi, Kalpesh Ashar, Akhilesh Gururani, …and who have you say that. So the industry which loves high premium comes out with a product called “Term insurance with return of premium”. This is a bastardized version of the Term insurance plan. It is a plan which is more expensive, and is a plan which you cannot throw away midway because of the lure of ‘return of premium’. Obviously the agent and the manufacturer make more money in this plan than in the pure term plan.

Take the case of HOUSING. The state government, the Centre, the housing finance companies all of them have a vested interest in telling you “buy a big house, you will buy it only once”, “owning pride, renter’s regret”…see the conflict of this advice.

You think Advisers understand conflict of interest? Hell, no. They think that AMFI – which is a big amc manufacturer’s lobby (please stop calling it the Industry representative) will work in their favor. This is amusing.

They come with regulations now and then to hurt the distributor. Let us look at 4 such rules:

1. A distributor cannot get commission on his own investments: Such a rule is completely irrelevant today, but the rule stays. It is amusing that no IFA association is asking for this being revoked. So the real big IFA puts it in direct code, some IFA aggregators seem to have found a way out themselves, and most small IFA do a reciprocal arrangement with their friends. Or Husband and Wife use each other’s code. Of course given the structure now, it is better to put it in direct, but that is another matter. This stupid provision should go.
2. If a client has not done kyc the agent does not get the commission. Great, however the money stays in the regular plan, and the amc makes ‘unintentional profit’. Unintentional as far as SEBI is concerned but surely for AMFI there is no need to talk about the end investor. Remember Amfi is an advocate of the MF houses, not a judge. So deathly silence prevails. Who benefits? Guess? Lol.
3. When a client changes his scheme from say dividend option to growth option, the funds move from the code of the broker to direct code. Why? nobody has an answer but that is the best practice of the mutual fund. So when a client walks into a fund house to change the mode from div to growth he is NOT told about this. He is given a form which he/she fills up – and the aum moves smoothly from the ARN of the distributor to ‘direct’. Of course the amc in its quest for income ignores the tax implication of the client. But hey, best practice! best practice for the amc of course. Investor be damned. IFA ? who he?
4. Another best practice is when distributors commission has to be made uniform, it has always been REDUCED. So even old commissions – which were low because an upfront commission has been paid, have now been reduced – well at least by a few big fund houses. Yes you guessed right. Best practice.

Is it difficult to understand how ‘conflict of interest’ works? No.Not really. I have my money mostly in equities – and partially in mutual funds. Clearly for my broker I make money ONLY if I trade. However, he has his stomach full – it was like that in 1979 also when he started. He has never ever suggested a life policy (he used to be an insurance agent earlier), or churn in my equity portfolio or investment in a mutual fund. It is so simple. You need to find the right person and keep the wealth creation process, and the PERSON in mind when you are thinking. There can’t be one rule. For example I pay a high brokerage rate – but since I trade so infrequently that it does not matter. Anyway the brokerage that I pay is a very small fraction of the wealth he has created for our family.