Advisory Model Gains Some Needed Ground
March 24, 2020 — Singapore
Regulator-led changes in China and Taiwan help the fee-based advisory model gather momentum
Despite Asian retail investors’ aversion to paying for advice, recent efforts in China and Taiwan to move their markets away from a transaction-based model are giving the advisory model a chance to gain ground.
Under China’s pilot investment advisory business scheme for public funds, launched in October 2019, participating providers offer investment options based on clients’ financial standing and investment management needs. Fees are based on assets under management (AUM) and must not exceed 5% of investors’ net asset value. By basing fees on AUM, regulators hope to incentivize advisors to act in investors’ long-term interests.
The China Securities Regulatory Commission (CSRC) gave the first batch of licenses to provide fund investment advisory services to five fund managers, and the second batch to three third-party online sales platforms. In February 2020, the CSRC issued its latest—and so far, the largest—batch of licenses to two banks and seven securities firms.
Scheme participants will have to work hard to deliver good returns in order to encourage more investors to use a fee-based advisory service. Despite this tall order, Cerulli believes the scheme could help create healthier competition among fund managers. And with the lifting of the foreign ownership cap for fund managers from April 2020, the scheme could help pave the way for foreign players to participate more in the local market—once it goes mainstream.
Recognizing the need to improve fee transparency and tackle the problem of churning, Taiwan’s Financial Supervisory Commission decided to move the local market from a commission-oriented sales model to one based on AUM. Last year, it rolled out new rules that address what it saw as a potential conflict of interest in selling funds based on commissions. The rules—which took effect Jan. 1, 2020—remove extra payments based on gross sales. They are expected to incentivize fund managers to focus on delivering better fund performance and looking after investors’ interests.
Fund managers believe the new model will be good for the industry over the long term and help make sales practices more sustainable. For some foreign fund houses, the new rules could help them raise assets onshore through a reduction in churning.
However, there is doubt that the change in model can stop churning. Some market players believe the loss in incentive fees from fund houses might only encourage sales representatives to churn more to compensate for the loss. Fund investors’ propensity to invest short term also makes it difficult to reduce this practice. In many cases, it is investors themselves who initiate switching from one fund to another.
“Moving to an advisory model will not be a cure-all solution to the region’s poor compensation transparency and problems of churning and short termism,” said Ken Yap, Managing Director, Asia, at Cerulli Associates. “However, it is a step in the right direction and could strengthen sales practices if backed by robust implementation and follow-ups to regulations.”