Incentives for self-serving behaviour

I had another run in with an investment advisor from my bank as soon as I got back to India.

He was trying to peddle some investments that I was clearly not interested in. I tried to explain very patiently that I was looking for an index fund to invest in and he kept circling back to a Small-Cap fund that was probably the product on which his incentives were better. What really ticked me off was that he kept spewing BS about how this bank's investment advisory was about putting client interest first and how they were doing this for my benefit.

I told him that I was risk averse when it came to investing in the stock market and the index was about as risky as I was willing to go. I thought this would take the discussion to index funds. Wrong. It brought us right back to the Small Cap fund.

I seem to remember that this is exactly how the 2008 mess started. Salespeople were being incentivized for hawking stuff that was clearly way too risky for the small investor and beyond the comprehension of the small investor. Truth be told, it was beyond the comprehension of most bankers too; witness Joe Cassano of AIGFP going on record to say about the CDSs that AIG had sold, "It is hard for us, and without being flippant, to even see a scenario within any realm of reason that would see us losing $1 in any of those transactions." This was shortly before the crisis blew and AIG had to be bailed out by the US Government. Cassano took home US$ 315 million in bonuses before he was asked to resign, not fired mind you, but asked to resign, in 2008. Quite a lot of money for someone who did not understand the products he was selling. No agency of the US Government has made any attempt to recover any of these bonuses.

I am bothered by the fact that the private sector banks in India appear to be reverting to the same incentive structures based on sales and not on profit. When the investment goes belly up, the small investor loses his shirt.