It is unfair of regulators to expect asset management players to operate in a commission-free world and rubbish to think that banning commissions will cleanse the industry of mis-selling, a forum heard.
In fact, the cost implication of such a straight-jacketed approach will likely backfire on retail investors – the very people it is being introduced to protect – and weaken the quality of advice they receive.
That was a view expressed by Nick Kalikajaros of software solutions provider Temenos in a panel discussion on fund distribution at the Fund Manager Selection Asia event in Hong Kong this week.
“I am of the view that clients should pay the way they want,” says Kalikajaros, a private banker by profession. “If I am happy with a commission-based structure with a private bank, that’s my call. It is nothing to do with some government regulator. It should be a client-led decision.”
The inference that banning mis-selling will rid the industry of rogue behaviour is misguided, he says; the opportunity to sell something to get better value-extraction from clients will always be there.
“[Banning commissions] is not the holy grail that will solve the problem of inappropriate behaviour towards giving advice to clients,” he adds. “What has to be addressed is discipline around the advisory process, how a product is identified as an appropriate match for a particular type of investor. It has nothing to do with commission.”
Mark te Riele, deputy Asia-Pacific CEO and head of marketing and distribution for BNP Paribas Investment Partners, agreed.
While noting that BNPP has been preparing its fund ranges for a commission-free environment, he says regulators should focus more on transparency and disclosure than telling the industry what it can and cannot charge. He notes up to 60% of marketing material in some cases is disclaimers and disclosures that clients never read.
Kalikajaros points to the potential cost impact from banning commissions. “I cannot see a bank deciding in its good nature to absorb that cost; that is going to be passed to the end-consumer. My concern is the quality of advice in the retail area might weaken,” he says.
A key point was made by Kevin Liem, chief investment officer and a fund selector/gatekeeper for TTG (HK), a locally based discretionary wealth manager for high-net-worth individuals.
“If Hong Kong is going to implement [commission-free] rules, insurance regulation needs to be consistent, otherwise the retail client will end up paying for implicit charges they are not aware of. The only benefit [of commission free] I can see is there would be more demand for ETFs.”
Te Riele agreed, saying many distributors have already indicated they would turn to working for the insurance industry “because the situation there is a lot less stringent”.
He argues the best way forward for Asia’s fund industry would be to look at pension-style incentives to stimulate investment. “This is far more important than focusing on commission.”
Earlier in the discussion Te Riele identified “herd mentality” as the biggest threat to the selection process for fund managers. “Selectors seem to go for funds most people are selecting because clients are asking for it and it is an easy choice to justify,” he says, creating a bias for the biggest managers.
He says the shift that needs to be made is towards a fiduciary relationship with distributors where more of an asset allocation decision is given to institutions or banks. “Then you will end up with more stable and healthier, long-term returns. But our lives will be a bit more boring,” he says.
But Liem of TTG points out fundraising has been tough for distributors over the past two years. “I understand that people going for the big names makes it much more competitive for smaller fund managers,” he notes, but says there is a need to be adaptable.
“We like [herd mentality] because we are able to pick up a lot more interesting strategies that the big guys are not doing. Picking up these hidden treasures is really how we add value to our client portfolio and beat the big guys.”
Liem suggests that more than 50% of the time fund closures happen not because of bad investment performance but bad operational management. “Doing a bit more operational due diligence and talking to management to understand their philosophy is very important,” he notes.
Kalikajaros argues distributors need to improve their discipline when it comes to reviewing fund managers sitting on their “19th century lists”. He notes these lists are officially reviewed once a year, but probably once every two years with real rigour and analysis.
“When you talk about a client portfolio, a firm is constantly looking at risk, return and other dynamics. My argument for a prudent product list is that the discipline should be exactly the same,” he says.
But he believes the sleepy, passive approach to fund management and fund selection is changing. “I think it is a good thing that we have had a financial crisis, because all through history you learn from your mistakes. If distribution models or fund houses are still acting in the same way as pre-crisis, god help you as far as I am concerned. You don’t deserve to have a licence.”