When buying financial products, scepticism is your best defence

For three decades, I have observed the machinery of banks, insurance companies, and investment firms with growing concern. The conventional wisdom suggests that a positive, trusting attitude leads to success in life. We’re taught from childhood that assuming the best about others usually works out well. This approach serves us admirably in most human interactions–except when buying financial products.

This reveals an uncomfortable truth: you should begin every financial transaction with distrust and suspicion. This isn’t pleasant advice. It runs counter to our natural inclinations. With countless well-intentioned savers losing their hard-earned money to glossy brochures and smooth-talking agents, it’s the only safe approach.

Why are financial services different? Because, unlike almost any other purchase, everything here is money–your money going in, their money coming out. When you buy a car, you exchange currency for tangible benefits: transportation, comfort, perhaps status. Both parties can win. The automaker makes a profit, and you get a vehicle that serves your needs.

Financial services operate differently. They’re fundamentally zero-sum. Every rupee the provider extracts–whether as management fees, processing charges, commissions, or hidden costs–is a rupee less in your returns. Every bonus paid to relationship managers, every rupee paid to influencers, comes directly from the money you’ve entrusted to them.

Nowhere is this principle more glaringly obvious than in the world of cryptocurrency. The crypto industry represents perhaps the purest distillation of financial misdirection in modern times. Strip away the technological jargon and revolutionary rhetoric, and what remains is a classic wealth transfer mechanism–not from the wealthy to the masses as proponents claim, but predictably from the uninformed to the well-positioned.

When someone enthuses about blockchain’s potential to “democratize finance”, they rarely mention that early adopters and insiders have already positioned themselves to profit enormously from mass adoption. The regular retail investor entering the crypto space isn’t participating in a revolution; they’re providing liquidity for others’ exit strategies. The zero-sum nature of financial services reaches its apotheosis in cryptocurrency markets, where there isn’t even the pretence of underlying productive assets.

This isn’t to suggest that all financial products are bad or that every advisor is dishonest. Many provide genuine value. But the incentive structure is inherently problematic. When the person advising you earns more by steering you toward certain products, objectivity becomes the first casualty.

Also Read: Why you cannot complain to Sebi about unregistered investment advisors

In India, this problem is magnified by regulatory frameworks that, in practice, often favour institutions over individuals. Consider almost every insurance product (except term plans), which continues to be sold aggressively despite their poor track record for most investors. Or the numerous innovative mutual fund schemes launched precisely when market sentiment is at its peak, designed to capture your money at the worst possible time.

The concept is elegantly simple: instead of predicting which stocks will soar, focus first on eliminating stocks with red flags. It’s generally easier to identify what might go wrong than to predict what will go spectacularly right. Similarly, in choosing financial services, elimination is your most powerful tool. Start by eliminating products with red flags: high costs, complex structures, or misaligned incentives.

Unfortunately, the message that we hear is the opposite. When one looks at the market for savings and investment products today, and sees the resulting investment portfolios that people are collecting, it’s clear that there’s a strong need for a self-aware and aggressive minimalism.

How do you protect yourself in this environment? 

First, educate yourself through independent sources. Read books and columns that aren’t trying to sell you anything. Second, make decisions independently, without pressure from sales pitches. Third, embrace simplicity. Simplicity serves your purpose best because you always know what is happening and why.

When it works, you can understand why and do more of that, and when it does not, then you can figure out why it did not. Does this approach feel cynical? Perhaps. But in financial matters, healthy scepticism isn’t cynicism–it’s self-preservation. Think of it as defensive driving for your money. You might trust other drivers generally, but you still check your mirrors and maintain a safe distance.

So the next time someone offers you a “once-in-a-lifetime investment opportunity,” an insurance policy that “guarantees” market-beating returns, or a cryptocurrency that “can’t fail,” remember: in financial services, trust but verify is insufficient. Verify, then verify again, and only then consider trusting–maybe.

Your financial well-being depends not on finding the perfect advisor but on developing the intellectual self-reliance to spot when something doesn’t add up. In this industry, where information asymmetry is the norm and regulations often lag behind innovations in extracting wealth, assuming the worst isn’t pessimism—it’s prudence.

Dhirendra Kumar is the founder and CEO of Value Research, an independent investment research firm.

Also Read: Could Sebi’s new curbs for investment advisers choke financial planning in India?