Check how a person gains before you accept advice.

However good be a person's intentions, most often than not, his incentives would silently drive his actions, be it in giving advise, offering help, or suggesting a solution. This point came out strongly to me when I was scouting for some advice on which Insurance policy I should get, and realised that the same holds true for several aspects of business and in life.

If you look at insurance policies for instance, you could look at its benefits from two aspects, Risk cover and Savings. Insurance for sure is an excellent method for covering risk, there is no other option that I can think of except prayer. When it comes to Savings, you typically hear from insurance agents, how your money is going to double or triple in the years to come. This happens very simply, because of the power of compounding, just as your investments are likely to compound if you put it in a fixed deposit, debt mutual fund, equity mutual fund or in good equities. So the reason an insurance policy also doubles or triples your money is because of the underlying asset that your money is invested into by the insurance company, be it into debt or equity, the insurance company does not have a magic wand to give better returns than the underlying assets.

Now the catch is that in an insurance policy there are higher payouts by way of commissions to agents, etc. etc. than in Mutual funds, and this typically makes an Insurance policy a poor option for using it for savings. So instead of say going in for a equity linked insurance plan, it makes sense to take a term insurance plan, which purely covers risk and put the rest of the money in a good mutual fund. This way one needs to spend much less for covering risk, at the same time invest in a mutual fund with a proven track record and flexibility to get better returns. Now why is it that the insurance adviser never gives this advice? In fact most insurance advisers will not mention a simple term insurance, the commissions are negligible.

One must view with skepticism, designations like advisers, education counsellors, etc etc. when their earnings are based on not the advice, but on the transaction. Since the earning is based on the transaction and not the advice; one cannot possibly get good advice.

The same problem happens in the advertising world, where often the advertising agencies get a percentage of the money spent on advertisements, the focus then unconsciously changes to spending money rather than getting results or spending it right, or for that matter getting results without spending money. The wrong incentives drive wrong actions.

A similar situation happens in various other professions as well, be it interior designing or architecture where the architect get a percentage of the the value of the project executed. Or in the real estate business, where obviously it is not in the agents interest to look for a bargain for the clients, the motivation is to increase the deal size. This motivation is no different from what would happen in the private equity industry for instance. The incentives are focused on closing the deal rather than the longer term interests of the client. In a lot of these cases perhaps the best way to do business is to give a success based fee,   however beware of the motivation, and do not take "advice" from people who are not incentivized to give the right advice. So it is best to seek advice from someone who is not going to make money from the transaction and use the agent for what he is good at; making the deal happen.

When I had to get interiors done for my office, after the Interior Designers drew up the estimate and their indicative fee, we told them, "OK, now lets fix your fees at this juncture. Let it not be a percentage, we will guarantee your fee. Now use all your creativity and talent, to reduce the project cost by 40% yet not compromise on the aesthetics and utility of the office." We did that project at much lower budgets, a lot of thought going into the right choice of material, saving material and designing right; to bring down the costs. The right incentives can bring about the right results.

By the way, I got my right insurance advice not from an insurance agent but from my father. Choose your adviser with care!

The author is the Chief Catalyst of Businessgyan, His areas of interest are business strategy and innovation. For feedback & more information send mail to thespark@ businessgyan.com

Issue BG86 May 08

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