While the mutual fund industry is still grappling with having mutual fund distributors adequately certified, there is talk of getting fund managers certified. The move is targeted at having fund managers clear a certification test so that they are qualified with a standard qualification and can be expected to manage money in line with certain minimum guidelines. While certifying fund managers may seem pertinent, we believe there is still unfinished business with regards to certification of mutual fund distributors.

Before proceeding to share our view on certifying mutual fund distributors, here is what Warren Buffet (arguably the greatest investor of our times) had to say about certification and qualification for fund managers -

"Success in investing doesn't correlate with IQ once you're above the level of 25. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing."

We agree with that which is why certifying fund managers is not such a crying need. We will leave that discussion for a more detailed note. Right now, we are more keen to address a more urgent need – certifying mutual fund distributors.

It’s been some time since AMFI (Association of Mutual Funds in India) in collaboration with the NSE (National Stock Exchange) has taken up the all-important task of certifying mutual fund distributors. Although the intentions were commendable, the execution in our view could have been much better.

Test centers
For one, there are limited examination centers for taking the certification test. The AMFI website lists only 6 centers for taking the online test, that’s it – just 6 examination centers (for the online test) to cater to thousands of mutual fund distributors. No wonder the waiting list for taking these tests can be as long-drawn as a month. Of course, online tests can also be held at other centers but NSE needs at least 100 applications from that area to organise such tests.

Granted that setting up online test centers is not the easiest of tasks, therefore there is a strong case for setting up offline test centers. These centers are relatively easy to set up and more importantly AMFI is not handicapped by NSE’s lack of resources on this front. So how many offline test centers do we have in the country? Brace yourself – we have only one center in the country (in Mumbai) where candidates can take the written exam. For a country that aims at being an investment hotspot, we certainly have a long way to go to accomplish something as routine as certification of mutual fund distributors.

Test material
Test centers apart, there is ground to be covered even in terms of the quality of test material. The material must be updated regularly to ensure that it is in sync with prevailing taxation laws. For instance, mutual fund taxation laws are usually modified in the annual budget, this must reflect in the study material. On the same lines, the study material must be oriented towards financial planning and asset allocations. Put simply, this means that mutual fund distributors must sell schemes based on the investor’s risk profile, so a 60-Yr old investor must not be sold a technology sector fund, which is ideal for an aggressive investor. The bane of the mutual fund industry is mis-selling; this means that investors are not being sold the right mutual fund. Or to put it differently, they are being sold mutual funds that are right only for their distributor thanks mainly due to the high commissions that these schemes attract. This brings us to the next point – on ethics.

Ethics
Although, ethics may sound esoteric and even irrelevant in the context of financial planning, it is the pivot over which financial advice must revolve. With high commissions being offered, both on ongoing schemes and new fund offers (NFOs), it is easy to appreciate why there is so much mis-selling happening in the mutual fund industry. Often, mutual fund distributors get swayed by these commissions and sell the wrong mutual fund scheme by totally ignoring the investor’s interests and investment objectives.

Like many business management courses that increasingly talk of ethics, corporate governance and social responsibility, the training material for the mutual fund distributor must tackle ‘ethics in selling’ to address mis-selling.

Lack of standardisation
At the end AMFI must answer the question whether the distributor certification has imbibed a certain level of standardisation and uniformity in the quality of advice. For instance, whenever a low-risk investor goes to any mutual fund agent, the advice he must get from each one of them is to maintain a higher debt allocation and a lower equity allocation. This is a thumb rule of financial planning and every mutual fund distributor must understand this well and his advice must reflect this recommendation.

However, we find the opposite - low risk investors have been made to invest in high-risk mutual fund schemes (remember the tech boom in 2000 when 60-Yr retirees lost money in technology funds?). Many times, the investor does not know why he was told to invest in a particular scheme until its too late.

Clearly, the certification course has failed in introducing standardisation in financial planning. Even service levels are not standardised, then at what level does the certification work? Why have it in the first place if it can’t bring about a certain level of parity in the most basic elements? Will it not be simpler to do away with the certification and instead have distributors who are at least graduates (which is a lot more difficult to do than the AMFI certification). Investors can then approach these distributors for their mutual fund investments. It is possible that like Warren Buffet, the investor may not be a big fan of these certification courses and instead believe that investing is all about ordinary intelligence combined with the temperament to control the urges that get other people into trouble in investing.