Is your Mutual Fund Agent taking you for a ride?

Being a mutual fund agent is one of the easiest things to do in India - anybody could do it.   All a person, call him Mr. Anybody, needs to do is pay Rs. 500 to AMFI and score fifty out of hundred on a test where most of the questions are something like this, "What does an equity fund invest in?".  The options are, (a) debt, (b) equities, and (c) neither.  Mr.  Anybody will then receive an AMFI Registration Number (ARN), regardless of whether he is a bored housewife, a steel magnate, or anybody else for that matter.  He is now licensed to tell you where to invest your hard earned money, and of course, earn a healthy commission along the way.  No wonder there are more than 90,000 AMFI registered distributors in India.  I won't claim to have spoken to all of them, but of the 500 I spoke to, I can confidently say that most of them are as qualified to give me financial advice as Mr. Anybody.  That's a pretty scary thought.

Our otherwise stringent regulatory system is the first culprit, in particular the Association of Mutual Funds of India (AMFI), which certifies mutual fund agents.  The person selling mutual funds is not selling soap, he is making asset allocation decisions that shape his client's lives.  If fund management - selecting a few stocks from the hundreds out there - requires professional qualifications and experience, why doesn't wealth management - selecting a few funds from the thousands out there?  SEBI on its part has set outstanding standards for fund managers.  Mutual funds need five years of stellar investment track record and a net worth of ten crores.  Portfolio managers pay ten lakhs in fees to SEBI and complete an application that scrutinizes everything from their professional qualifications to their IT infrastructure to their office space.   That is why we have only 40 mutual fund houses and 250 portfolio managers.  Why isn't a mutual fund agent - often your first entry point into investing in the markets - held to a comparable standard? 

The industry's compensation structure is also guilty and consumers are often unclear and unaware of how their agent is compensated.  Agents are paid a commission by the mutual fund comprising of an upfront fee and a trail fee later in the year.  Although SEBI's recent regulations have improved the situation, the incentive for your mutual fund agent is still two-fold.  One, sell you the mutual funds that are earning him the highest commission, and two, convince you to move from one fund to another frequently, to increase the amount of upfront fees he earns.   Agents get paid nothing for either giving you good advice or for picking good funds for you, a grave misalignment of incentives. 

The solution is for AMFI and SEBI to upgrade the mutual fund agent into an investment advisor, a full time professionally qualified individual who can say more than choose equities over debt when you are young and choose the best performing fund of the week.  An investment advisor should understand the entire range of products available to various classes of investors, the risk profile of each, systematic asset allocation, and the basics of manager selection.   Give us good advice and charge us for it.  As for buying mutual funds, we don't need someone to do that for us.  We buy stocks online, and with an online platform for mutual funds, we should be able to do the same.  I would certainly be happier paying for good advice and knowing I am investing money in what's right for me, not what makes money for my agent.

What should you do with your favourite mutual fund agent in the time being?   For starters, check his qualifications - at the minimum, he should have a degree in economics or finance and multiple years of experience in investment or wealth management.  Then, test his asset allocation skills -  ask him how  his recommendations would change for different individuals in various hypothetical life situations?  What does he define as risk and how does he measure and quantify it?  Finally and most importantly, understand his incentives and how they are influencing his recommendations.  Is he always advising you to choose equities over debt because commissions on equity funds happen to be much higher?   Does he periodically recommend you switch to a different fund, because he is running low on commissions?  If you suspect that his recommendations favour his interests more than yours, confront the problem.

It's about time Mr. Anybody stopped giving us financial advice.  Money management isn't rocket science, but it isn't anybody's business either.

- Radhika Gupta

The author is co-founder of Forefront Capital Management, a specialized portfolio manager providing equity investment solutions.  She can be contacted on radhika.gupta@forefrontcap.com

For more Columns by Experts click here