With Asia-based investors generally averse to paying for advice and preferring to trade on their own, the fee-based advisory model has been considered to have little chance of catching on in the region, according to a report by Boston-based research firm Cerulli Associates.
In Hong Kong, for example, sales commissions and fees for advice have been key topics of a year-long consultation on the Securities and Futures Commission’s proposals to enhance asset management regulation.
Toward the end of the consultation in 2017, the regulator said it will not adopt a fee-for-advice model, with industry participants saying that the Hong Kong market was not yet ready because only a few investors in the SAR pay for advice.
However, Cerulli noted that recent regulatory developments in Taiwan and China are “worth watching”, as they can potentially change their fund industries and influence a larger shift in the region.
Taiwan
Effective in January, Taiwan’s Financial Supervisory Commission (FSC) rolled-out the AUM-based compensation model for mutual fund distribution, eliminating commissions based on gross sales, according to the report. A Cerulli spokeswoman added that before that, “extra payments” were also abolished, such as initial fixed fees for marketing and sales campaigns to distributors.
The regulator made the move to address the problem of churning, where many of the banks’ representatives encourage switching from one fund to another to get more commissions. Taiwan also is one of the costliest mutual fund markets to operate in the region, given the high fees that banks charge, according to a Morningstar report published last year.
Cerulli believes that the regulatory development should address the issue of churning. This will also help foreign fund firms operating in Taiwan to raise more onshore assets.
However, the report noted that before the new rules took effect, a few fund managers indicated that they did not believe that the new AUM-based model would make a significant difference to their distribution costs. The fund firms expect banks to ask for higher trailer fees to make up for the shortfall in their fee incomes, the report said, adding that trailer fees have already risen by an average of 50% across various fund types.
Nevertheless, Cerulli believes that the new compensation model should be a “step in the right direction”.
“[The AUM-based model] could strengthen sales practices if backed by robust implementation and follow-ups to regulations,” it said.
China
In October, the China Securities Regulatory Commission (CSRC) launched a pilot scheme aimed at asset managers to address fund distribution.
The regulator issued the first batch of licences for the new scheme to five domestic mutual fund firms. In December, three more licences were given to online mutual fund distributors.
According to Cerulli, one of the scheme participants, China Wealth Management (subsidiary of China Asset Management), already has 100 investment advisors working for the advisory services. The firm has also developed an app for the scheme, where investors can access 10 standardised advisory portfolios from a range of fund managers.
The report added that in February, nine more licences were given to two banks and seven securities firms, which include China Merchants Bank, Ping An Bank, China Galaxy Securities, Guotai Junan Securities and Huatai Securities.
However, given that the advisory model is new in China, it will be challenging for scheme participants to convince investors to pay for advice.
“It would take time for the advisory scheme in China to go mainstream,” the Cerulli spokeswoman said. “Licensed players need to differentiate themselves to prove that the services are truly value-add. High net worth individuals could be more open to the new scheme, followed by the middle class or mass affluent who are willing to pay for knowledge, and finally, the general retail.”
Nevertheless, Cerulli believes that the scheme could help create healthier competition among fund managers long-term. In addition, this should also pave the way for foreign players to participate more in the local market, especially since limits on foreign ownership of retail fund management firms are set to be removed next month.
India and other wealth managers
India has also made changes to its commission-based model, according to the spokeswoman. In 2018, the Securities and Exchange Board of India (SEBI) directed fund houses to move to a complete trailer fee-based model of commission, without any payment of upfront fees.
“The SEBI is also asking the industry to have separate licenses for fund distribution and advisory businesses, which can be seen as a step for gradual movement toward the advisory model,” she said.
Wealth managers are also doing their part to encourage investors in the region to shift away from transactional models, according to the report.
Deutsche Bank Wealth Management, for example, rolled out in Hong Kong and Singapore last year a platform that bridges the gap between transactional advisory and wealth discretionary mandates. The platform, which offers a flat fee pricing model, combines advisory and discretionary portfolio management services, in which it recommends a multi-asset portfolio based on a client’s profile, though the client will still have the final decision to accept the recommendation.
In 2017, Credit Suisse introduced a fixed-fee portfolio advisory service in Hong Kong and Singapore, aiming to be more transparent about fees, according to the report.
