Taiwan banks’ habit of constantly shifting the assets of their investors into new funds in order to earn fees is gaining increasing levels of exasperation among fund houses, online plaform providers and research houses alike—and upsetting the investors themselves, market participants told AsianInvestor.
Speaking during a set of meetings in Taipei last week, various industry participants claimed that financial advisers at the banks frequently suggest that their clients (who are both retail and high net worth) shift assets from one fund into a new one. While they tell the clients they should do so in order to earn higher revenues, the advisers also get to charge them another round of fees if they do.
This practice is known as churning, the director of wealth management at an international bank told AsianInvestor. It’s a common tactic among many banks that distribute funds in Asia. The salesperson gets paid a retrocession fee of several percentage points from the assets of every client they bring into a fund. And each time they switch the clients’ assets to a new fund, they can charge another round of fees. This is often not made very clear to the end investor.
The practical impact has been a fragmentation of assets under management (AUM). Investors constantly shift into newly launched fund vehicles, which leaves many existing funds with miniscule AUMs. As of December 2017, there were 800 outstanding funds in Taiwan from 39 fund houses, according to the Securities Investment Trust and Consulting Association of the Republic of China.
It’s also left investors increasingly disenchanted with the banks’ fund selling tactics. "People like to get credit card, mortgage, deposit, insurance policies from banks, but they are not keen to make investments with them", argued the wealth management director.
Fund houses are also annoyed at the sales tactics. Several executives at asset managers told AsianInvestor that as banks drive up the transaction volumes, the liquidity of the funds they operate diminish.
They say they hope that Taiwan’s financial regulator, the Financial Supervisory Commission, can change the rules about how banks charge fees on funds.
An executive at Fundrich, a partly state-owned online fund platform that is obliged to promote the fund management industry, argued that his platform does a superior job to the banks when it comes to giving investors investment options. He noted that can buy the exact same funds offered by banks on Fundrich’s platform with very little transaction fees.
Fundrich offers investors respective discounts of 80% and 70% to the 3% and 1.5% normal charges for subscribing to offshore equity funds and bond funds, according to its website.
Domestic banks are not happy to be the target of such criticisms. A senior manager at a local bank told AsianInvestor that his institution’s wealth clients are smart people who know what they are doing when investing and want to make money. He also argued that the clients don’t listen to all the ‘suggestions’ offered by the financial advisers selling them products.
To his eyes, the fund houses are a large part of the problem. He said that they issue large batches of new funds each year, but that these often have little differentiation between them, which makes them hard to sell.
Of course, this doesn’t explain why the banks have been so eager to push their clients into new sets of products if they don’t vary greatly from existing ones.
Private equity opportunity
There is one good piece of news for the bank executive: fund houses believe they may be able to launch some innovative products in the coming months due to a more open-minded stance from the island’s regulator.
The FSC is loosening its grip on fund regulations so the industry can develop more diversified products, the chief executive officer (CEO) of a fund house said. One example is the birth of a local private equity fund industry.
Cathay Securities Investment Trust is in the process of launching the island’s first-ever private equity (PE) fund. This vehicle will focus on raising capital from institutional investors, and is likely to be followed by a set of other private equity fund launches.
The launch of private equity funds marks a new area of opportunity for Taiwanese fund houses. They are known as securities investment trust enterprises (SITE), a name that they can only invest in public traded securities. Because they can now launch private equity funds as well they will become asset managers and not just fund managers, the founder of a local research house told AsianInvestor.
When combined with a generally positive market environment, the prospects for more fund inflows look good, said the CEO.
“We are cautiously optimistic,” added the chairman of another local asset manager, although he wasn't so sanguine as to provide AsianInvestor with any predictions of improving investment flows.