Around three quarters of 132 advisers surveyed said they see a trend toward fee-based portfolio management. However, only 22% see their own practice becoming fee-based in the next five years, according to the report.
Although advisers believe they will be able to help their clients more with a fee-based model, they acknowledged that their reason for adhering to a commission-based model is revenue-driven, the survey said.
In Hong Kong, 45% of the respondents’ aggregate practice was fee-based. Only 5% said their practice was 100% fee-based.
Adoption of a fee-based model to replace the current commission-based wealth management model Vanguard took in $93bn in ETF assets in 2016 and remains a global leader in passive instruments would likely spur wider adoption of passive funds such as ETFs in client portfolios.
However, most of Asia is using the commission-based model, which typically gives the wealth manager a commission on each transaction. (Wealth managers typically do not get commission on ETFs).
If the fee-based model were widely adopted in Asia, firms such as Vanguard would stand to benefit. Vanguard is a global leader in passive instruments. In 2016 alone, it took in $93bn in ETF assets.
Advisers in Hong Kong also believe that their clients do not understand the differences in the compensation structure (commission vs fee model) of wealth management, even though at the same time they tend to believe their clients are savvy investors.
More confusion comes from a previous survey released by HKIFA in January, which showed 57% of the 760 Hong Kong investors polled said they prefer a commission-based model, as reported.
“Those who prefer a commission-based model opine that it is fairer and easier to understand. They also think that a fee-based model is not optimal as they don’t make fund transactions frequently,” HKIFA said in a statement that highlighted survey findings.
The association noted that the respondents who make frequent transactions would prefer an annual fee model. “Supporters also expect a wider choice of products will be made available under this model and there would be less conflicts of interest,” HKIFA said.
Client relationship strain?
The Vanguard survey also revealed that advisers generally found their clients challenging, especially when compared to the other markets polled.
Linda Luk, Vanguard’s Hong Kong-based managing director for retail and intermediary business for Asia, attributes the behaviour of Hong Kong investors to the commission-based model.
“Unlike the other surveyed regions, the advisory industry in Hong Kong is primarily commission-based. Such a structure brings a transactional nature to adviser-client interactions, and if the transactions don’t always work out because of poor timing, or market volatility, the relationship itself could come under strain,” Luk said.