The lock that consumer banks have on selling mutual funds at the wholesale level in Asia is diffusing as firms turn either to more private banking arrangements or opt to sell directly to retail investors.
A panel of retail bank distributors and fund managers at AsianInvestor’s Art of Asset Management conference say a leading cause of diversifying business away from traditional wholesale arrangements is the cost of compliance.
Rising costs of regulation can’t be easily passed on to investors. “Therefore we are targeting high-net-worth segments more than mass retail,” says Janet Chong, head of investments and insurance business at DBS.
Although there is what she calls social pressure on banks to maintain a funds and advisory offering for mass retail customers, “We need to make a better business from the retail segment.”
Raymond Lui, head of product and business development at Hang Seng Bank, agrees that increased compliance costs make the traditional bank wholesale model less attractive. In Hang Seng’s case, the solution is to look to technology to make direct sales more practical.
Lui notes that an online platform is far cheaper to operate than bricks-and-mortar branches and the salaried staff that go with them. Providing an open platform with 24-hour access to fund information and disclaimers also reduces the compliance costs of individual fund sales, he says.
These measures are not going to replace traditional wholesale models but are seen as the way to go in the face of increased business costs.
Consumer protection rules enacted in the wake of the 2008 crisis created sales processes that customers find irritating, as well as new requirements around risk disclosure, product suitability, and product data. And the current market demand for simpler products has reduced the chance to sell higher-margin products.
Mabel Chan, head of regional retail distribution at Henderson Global Investors, says fund houses are not necessarily choosing between mass retail and high-net-worth segments, but their sales and product people must now be able to accommodate both. They must also be prepared to juggle more product types, including alternative investments.
“We have to diversify our efforts beyond catering to the mass retail market,” she says.
Ultimately this will result in less choice for the mass retail market, says Praveen Jagwani, CEO at UTI International.
Wealth managers catering to rich clients in Asia, meanwhile, are enjoying a surge of new business, say private bankers on a panel chaired by Leigh Powell, managing editor at AsianInvestor.net.
John Ng, managing director at Bank of Singapore, says private banks’ fund sales were very low before 2008, but the crisis has led to more customers valuing professional advice and portfolio management. Funds now make up 5-10% of client portfolios – a gain for Asia, but still a far cry from the 25% for typical European portfolios or 40% for US ones.
Private banks have also been more active in suggesting clients invest in mutual funds. Timothy Loh, managing director of French private bank CIC Investor Services, says pre-2008, banks generated profits through trading. Today such profits are unavailable, so they are turning to fee-income activities such as selling funds.
But it’s not an entirely positive story for fund sales by private banks. When it comes to hedge funds, investors have pulled back, says Thor Monsen, head of strategy for Asian hedge funds at Citi Private Bank.
Until 2008, worldwide, 60% of hedge-fund industry assets were held by private individuals. Today that’s fallen to around 40%, because expectations were too high and because the industry failed to deliver in the wake of the crisis.
Monsen believes hedge funds are actually benefiting most investors, noting that despite the industry’s worst two years ever, 2008 and 2011, hedge funds as an asset class have outperformed the MSCI World Index in absolute and relative terms on a five-year basis.
This highlights the biggest problem for private banks in Asia: their clients, already short-term in outlook, are even more so today. Rich people chase trends and herd together as much as mass retail investors.
“Some of the more active clients are just following the news flow and trade their mutual funds every two or three months,” says Ng.
But this is also leading private banks towards developing a business based on advice rather than just broking; and to selling their due diligence on funds.