China’s securities regulator has awarded third-party mutual fund distribution licences to four independent financial advisers (IFAs) – almost eight years after it granted its first such permit.
The move to hand approvals to East Money Investment Consulting, Howbuy Fund Research, Noah Holdings and Zhonglu Investment Consulting could finally provide a release valve to China’s pent-up distribution system, suggests consultancy Z-Ben Advisors.
The firm notes that poor returns and high redemption rates have forced fund management firms to rely on product quantity rather than quality, causing a bottleneck among China’s four big state-owned banks (ICBC, CCB, BoC and ABC) that act as primary distributors of mutual funds.
“The official invitation for IFA participation stands to significantly alter the current distribution landscape,” reflects Francois Guilloux, regional sales director at Z-Ben.
The licence approvals come after the China Securities Regulatory Commission (CSRC) issued a directive titled “Measures for the administration of the sale of securities investment funds (revised)” last June. The measures became effective in October, setting out new rules to allow mainland third-party mutual fund distributors to sell funds.
At present the only IFA in China with a fund distribution licence is TX Investment Consulting, which had its permit granted back in 2004 but has struggled to become profitable.
“Whether IFAs can play a significant role in the distribution of mutual funds in China is still uncertain,” its chief executive Lin Yixiang told AsianInvestor last year (see the June edition of our magazine for a feature on IFAs in China).
Data for 2010 shows that banks accounted for 60% of open-ended mutual fund distribution in China, with 9% from securities companies and direct sales from fund management firms accounting for 31%.
What’s clear is that IFAs are almost non-existent in this business. The challenge for the incoming players is to provide value-added services to retail investors such as asset allocation, fund selection and fund of funds product management, which are not provided by banks.
“What is lacking in China is professional fund services,” says Ben Yang, general manager of Howbuy.
He says Howbuy aims to help retail investors find “more suitable fund products, more flexible fee structures and adopt more rational asset allocation plans”.
But Mark Kirkham, chief executive of Hong Kong-based IFA Platinum Financial Services, suggests that by far the biggest value-added service that IFAs can offer retail investors compared with banks is transparency.
But whether IFAs can challenge the dominance of the banks in the fund distribution space remains highly questionable.
Banks can tap into their existing client base of depositors, whereas customer acquisition for IFAs is a far more difficult task. “Banks rely on their brands and deposit account holders, but IFAs don’t have these and will have a tough start,” Kirkham notes.
Lin also points out that one important reason why banks dominate the fund distribution channel is that retail investors have confidence and trust in them. “This may take a long time for IFAs to build,” he says.
Given that the old cold-calling model is not a realistic option anymore, IFAs will need to experiment with new ways of sales and marketing, including seminars, personal networking and e-campaigns.
Howbuy says it is going to launch an online platform providing retail clients real-time financial information, discounts in fund subscription and customised wealth management services.
Although fund houses are trying to boost direct sales through e-commerce, Kirkham notes “they are not that gifted in the sales area”, and suggests this is where IFAs can add value. “Products do not sell themselves, they need to be sold,” he says. “You need IFAs there to be proactive with clients.”