Ever wonder why (good) financial advisors are so obsessed with the cost of services they get? The reason is that financial services are different. They are all about money. Let me explain.
Let’s say you are trying to choose a mid-size car. You have a wide variety of choices. You could buy one from Tata Motors for ₹7 lakh, or Maruti for ₹9 lakh, or from Honda for ₹13 lakh, or from Mercedes at ₹35 lakh. Is everyone except Tata overcharging? Not really. The deal is transparent and clear. You’re giving each company a certain amount of money and in exchange you’re getting some combinations of performance, reliability, safety, gadgetry, prestige and whatever else you look for in a car. You give money, and you get back these other things in exchange.
If a car company wants to make more money, it enhances the attributes you value and charges more.
Financial services, specially investments, are different. In their case, the only thing 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 but some the service provider retains for expenses, profits, sellers’ commissions etc. Therefore, unlike cars or shoes or phones or anything else, financial services are a zero sum game.
{{/usCountry}}Financial services, specially investments, are different. In their case, the only thing 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 but some the service provider retains for expenses, profits, sellers’ commissions etc. Therefore, unlike cars or shoes or phones or anything else, financial services are a zero sum game.
{{/usCountry}}Here’s a really important implication of this: for a given type of financial service, and a given competence level with which it is run, literally the only way the provider can make more money is to reduce what the customer is getting out of it!
If the provider wants more of anything — profits, salaries, a fancier office, better laptops— all of it comes from reducing what you get. If it wants to increase sales, pay more commissions to agents... EVERYTHING comes out of your pocket.
So the next time you get attracted to a‘ premium’ provider of financial services instead of a low cost one, just remember where the money is coming from.