A message to all fund managers: Asia is ready for fee-based advisory services now, says Kelvin Yip of iFast Financial.
General manager of the online distribution platform, Yip points out that 95% of the firm’s assets are catered to by a fee-based service, with just 5% based on a transaction fee.
“When we meet new fund managers, they say Asia is not ready for a fee-based model yet,” he said on a distribution panel at AsianInvestor’s recent Art of Asset Management conference in Hong Kong. “It is not that Asia is not ready.
“There’s a need to shape the confidence of managers who want to use ETFs as part of their asset allocation. Some advisers want to use active funds. But we want to convey to all fund managers that Asia is quite ready for fee-based services.”
Yip notes that iFast Financial follows a managed architecture approach, supporting some 700 funds on its platform. It charges an additional advisory fee based on AUM that he describes as transparent to clients.
He acknowledges that this increases the pressure to provide alpha, adding: “Fund managers need to deliver on the numbers, then the retrocession payment [from distributor to manufacturer] becomes less important.”
This is a debate that stirs mixed emotions, with a distribution panel last year rubbishing the commission-free concept and saying it was fanciful of regulators to think that banning of commissions would rid the industry of mis-selling.
And Marc Lansonneur, Asia-Pacific head of investment teams and market solutions at Société Générale Private Banking, told AsianInvestor’s forum that retrocession fees were still very important to private banks.
He estimated that fee-based advisory services were 3-5 years away in Asia, suggesting such a model needed to become a more resilient part of income before adoption. Still, he said the industry was preparing for this eventuality.
The topic arose during a discussion on whether there was genunely room for active managers in the retail arena, or whether distributors should simply focus on being beta providers in that space.
The conference heard that two-thirds of funds in search of alpha fall behind the market, raising questions over the value proposition against exchange-traded funds, for example.
Bruno Lee, regional head of retail for Asia ex-Japan at Fidelity Worldwide Investors, argued that the key question should be how to focus on funding the one-third of funds that outperform.
As a buy-side fund house, Fidelity is unusual in that it provides third-party distribution and runs a fund selection group based in London.
“There are still opportunities to search for active managers using stringent research and product screening,” Lee said. “Also, the more awareness there is of passive funds, the more pressure there will be on manufacturers to come up with high-conviction products.”
But Vineet Vohra, regional head of wealth development for Asia Pacific at HSBC, suggested there was room to review the cost of alpha provision within the retail segment.
“The mushrooming growth of ETFs around the world is reason enough for us to look back and ask whether we have utilised that momentum enough,” he noted. “This [Asia] is one place where momentum would work. There should be an ETF-based portfolio in everybody’s core [portfolio].”
Vohra also raised questions over the provision of multi-asset solutions and whether the market had erred in morphing what was a core strategic solution into something very tactical.
HSBC has been one of the big sellers of multi-asset solutions in Asia. Denis Gould, the bank’s CIO for multi-asset and wealth in Hong Kong, has previously stressed its multi-asset range is focused on asset allocation based on valuation cycles rather than short-term tactical switches.
Vohra told the forum: “I think multi-asset [solutions] play a very important role, but perhaps we as an industry should consider how they are being positioned. I think we should go back to what are the core building blocks.”
Yip of iFast suggested the one missing part of a multi-asset solution has been commodities. “The future may be commodity funds,” he said.
Other product trends the panelists pointed to were short-duration fixed income funds, US and European high-yield, floating-rate and RMB/CNH funds. Real protection from inflation was also highlighted as a potential future trend.
As for the US equity market, which has seen a significant run-up this year, Lee noted that Asian portfolios were still relatively underweight.
“I think the US needs more attention, there is not enough awareness of the underpinning of the US recovery,” agreed Vohra, conceding HSBC is also underweight. “I think we should all invest in talking about how that is real and here to stay.”
Yip countered that investors had been piling into US high-yield bond funds before the tapering warning by Federal Reserve chairman Ben Bernanke in May.
His point was that investors had been investing not due to track record or performance, but because of fund features. He cited numerous share classes introduced in the past two years, which fund houses promoted based on gross yield rather than net yield.
“Ideally we as distributors or asset advisers focus on asset allocation, while fund managers focus on delivering performance,” Yip stated. “But in reality, fund managers are focusing on features and on advertisments.”
Lee responded that the recent trend for income products was understandable as investors sought an alternative to low-rate deposits. He stressed it was important for customers to understand what they were buying, and for both fund houses and distributors to work together on education.
“It is the absence of a clear understanding of style and financial objective that makes us end up where we are,” concluded Vohra. “We need to go back to basics and understand why people invest. I think we can do that in Hong Kong. There is a very supportive industry and we need to come together on this.”