When the Insurance industry was opened up around 2000-01, there was optimism that the new players would bring in more options, better pricing and better service for the consumers.
But in the name of innovation, the Insurers scammed their customers with ULIP that was conceptually a great product mix of insurance and investment but had huge charges.
I had heard Parag Parikh saying that all financial innovations are designed to make money for the industry rather than the customer. I googled it yesterday and found his interview where he explains:
Investors need to be made aware that the so-called innovations of the financial markets are always against their interest. Take the case of derivatives – they are good hedging instruments but have been structured in ways people cannot understand. They are thus used as speculative instruments. The credit card, a great financial innovation for convenience, has been turned into a product which gets people into debts as they spend beyond their means and the issuers charge hefty interest, making themselves richer at the cost of their clients. Margin trading, loans against shares and IPO subscription make investors trade more than their capacity, ultimately violating the basic principle of investing – that investment has to be made from one’s own money and not borrowed money, or else it is speculation.
Initial Public Offering is one such innovation which is against the interest of the same investors who apply for the offer. I have devoted a full chapter on the same; I’ll give you a gist. IPOs always come in bull markets. Why? Because the investors are willing to pay any price for the stock. They never come in bear markets because the management is not willing to give the shares to the public cheap as they believe that the shares are more valuable. That is the reason we saw no IPOs in end 2008 and beginning 2009. The company appoints an investment banker whose fees are dependent on the maximum value he can get for the shares from the public. The investors read the research report and listen to all the good talk about the company from the same investment banker appointed by the company. Moreover, today IPOs are market priced and if one is paying a market price one has a choice of over 6,000 stocks in the market. Why is there so much hulabaloo about an IPO? Because they spend money on advertisements, the media creates hype, people fall for it and end up paying a fancy price.