Wednesday, January 26, 2011

We trust in everyone, but ourselves

When we go to the doctor we trust that he will give us the best advice possible which is in our best interests. The same applies for a financial advisor – or what passes for financial advisors in our country, which is insurance agents, ppf agents, relationship managers and middlemen of all kinds. In case of the medical profession, at least we pay some fees to the doctor, so there is some incentive for him to stay honest if he is of the principled kind. In case of financial advisors, we do not pay anything; we know that the agent gets paid his commissions from the company which sells us the product; and still we expect that the advice will be in our best interests!   We have an infinite capacity to delude ourselves, so as to not take responsibility for our own actions!


Almost every diagnostic clinic offers a standard percentage cut to the doctors who recommend their tests. The doctors have targets from the hospitals they are part of for "bed occupancy" and " revenue per bed per day".  Medical representatives keep pushing doctors to prescribe their more expensive brands in preference to cheaper generic alternatives. Doctors are sponsored on foreign junkets which are titled as seminars. Equipment such as sugar monitors are sold at a subsidized rate since the strips which are consumables required daily can be sold at fifty times the production cost.


Consumers are not well educated on generic or other-brand alternatives for the same drug. Even those who ask for a generic alternative get cheated because there is an industry out there which makes very cheap generics with very expensive printed MRP's which makes it a double whammy – the consumer pays more than what he would pay for a reputed brand for buying a cheap generic! Medicines are also bundled into all kinds of useless combinations in order to position them better and increase the price - in several cases the combinations are actually harmful.


If you are unfortunate enough to land up in a hospital for an ailment yet to be diagnosed, you can be sure there will be several tests, and several cross referrals to other specialties and further tests prescribed by those doctors. When you are being admitted to the hospital you will likely be told that only the more expensive rooms are available. This will happen especially if the hospital knows that you are going to claim insurance – they ask you that question even before asking you your name.  All operation and consultancy charges are in direct proportion to the amount you pay for the bed.  I don't know how this system is allowed to persist; apparently it has something to do with cross-subsidizing the people who are less well off, but surely there are better ways to do that?  


When it comes to insured patients the system ensures that the bill is inflated.  The patient does not mind; he thinks he is getting better treatment at someone else's cost. Third Party Administrators (TPA's) in case they are involved take a pretty big cut as well. All this is finally paid for by all consumers in the form of higher insurance premiums and also higher costs even for those who do not have insurance. The US healthcare system shows us to what ridiculous levels all this can reach. We in India have started moving down the same path – for the last few years, the rate of inflation in medical costs is more than twice the normal inflation rate.


When anything becomes an industry with large investments,  with an entire ecosystem emerging  to back it up, you can be sure demand will be engineered or induced in such a way that the industry survives and grows. Do you hear the Biocon ads on diabetes control  on FM? Is that the industry responding to the large incidence of diabetes or is it industry creating a hype around the disease to create an unnecessary need to do expensive tests and increase daily monitoring?  When there are several huge hospitals in the city with investments of a few lakh rupees per  bed, don't you think there is an incentive for the hospitals to create a need around using their services? To what extent is the hospital there because the patients need it, and to what extent are the patients lining up because the hospital came up in the first place, is a moot point. The answer in all such cases is fuzzy.


Just like medicine, financial services is also an industry. Just as with the medical industry, we need to be aware of the pitfalls of dealing with the financial services industry – not all companies or advisors out there are out to cheat you, but there are many who will; and there are many who will take advantage of your ignorance to push an unsuitable product on you, which while it may not be cheating, would be bordering on the unethical.


The insurance agents have their targets. They are induced to push ULIPs which are pure scams, even in the so-called "capped commissions" new avatar, or the old fashioned Endowment plans which are non-transparent with huge commission structures, and never Term Insurance which is all you need the life insurance company for.  


Mutual Fund distributors push new untested funds by asking you to shift your money and keep churning – this is because the commission on new funds is higher. The fund industry will keep coming out with newer variants of funds most of which do not make sense and have very vague mandates. They keep shoving the same toothpaste into newer packaging. New mint flavored flexi-cap infrastructure diversified fund! I am waiting for that to come – that day is not far away.


Recently a scam came to light – it was discovered that some very large corporate clients of money market funds were effectively earning two days' interest by deploying one day's funds – this used to happen by taking advantage of the cut-off times for different funds that were kept different to aid in this. Who pays for the extra day's interest? The other unit-holders of the fund, of course. Since SEBI has put in place some rules to safeguard against this in future, the fund industry fears a drop in corpus.


Gold and silver may be a good investment, but not in the form in which they are usually sold.  There are huge margins on gold and silver which are charged in various forms – making charge, melting charge, labor charge, margin charge – which makes jewelry or silver items a bad investment. Even the margins on gold biscuits or silver bars can be quite high if you do not know where to buy them.   Since more and more people are starting to get a little savvy about gold values, the industry has started pushing diamonds now – diamonds may be forever but their investment potential is poor. To the best of my knowledge all rocks last forever. The diamond industry led by De Beers has done a fairly good job of capitalizing on the already existing mystique around diamonds, and adding to it, to their commercial benefit.


The relationship manager at the bank has his targets – and they are product specific. You can be sure that whatever product he is pushing is based on the commissions the bank is getting, and not because he has your best interests at heart. He also has the unfair advantage of having access to your bank account information, and knows how to strike you at your most vulnerable moments, when you have money to spare.


None of this should surprise you – when it is an industry out there, all these practices are bound to exist. What should surprise you however – it does me – is how we as consumers are not really bothered to educate ourselves at least to the extent required to see through these marketing tactics and decide on what is really good for us. I suspect a large part of the reason is our reluctance to take things into our own hands; in case we educate ourselves we have to face up to the fact that we are ourselves responsible for our health (or illness), both in the case of physical health as well as personal finances. It is far easier to just trust someone blindly and blame the vagaries of fate and the vicissitudes of life for our state of perpetual impecuniousness. 

1 comment:

Anonymous said...

very informative!