Korea’s financial markets regulator is looking to prioritise approval of an online funds supermarket, with figures showing that the asset management industry has continued shrinking since 2008.
The entity – Fund Online Korea – was set up in late September and established a 10-strong committee of executives led by president and CEO Cha Moon Hyun. It applied to the Financial Services Commission (FSC) for a business licence last month.
And the FSC has announced it will approve the application as soon as possible, with expectations it will be up and running by February and fully operational by March.
The regulator is incentivised to act speedily, given that Korea’s funds industry has slipped backwards in terms of assets under management over the last five years.
The thinking is that the drop-off in demand for fund investment by both institutional and private investors is partly due to inefficient distribution and high costs.
The latest FSC figures show that in 2004 Korea’s funds industry stood at $102.7 billion in AUM; by 2008 that had more than doubled to $222 billion. However, it has since fallen, to $188 billion by 2010 and further to $184 billion as of September 30 this year.
The proportion of fund investment by Korean households as a percentage of total financial assets stands at just 3% on average. That compares unfavourably with 12.3% for the US, 7.2% for Europe and even 3.8% for Japan.
Such statistics have spurred the government to collaborate with Korea Financial Investment Association (Kofia) – the country’s main body for financial industry lobbying – to establish the online funds supermarket. Kofia sent out an RFP to consultants to advise on the project early this year.
This initiative is designed to break the grip of distributors – almost exclusively banks and securities firms – over fund sales. Another of the government’s goals is to bring down fees.
Around 85% of investment fund sales in Korea are by the biggest 10 asset management companies – all of which are affiliates of banks or brokerages, which distribute these products.
Kofia, with the advice of Deloitte, called for an initial seeding of W20 billion ($18.8 million). Fund managers have been asked to stump up, with the biggest 10 investing W1 billion each, along with lesser sums from smaller managers based on AUM.
In all, 47 asset management companies have now committed $21 million in pre-paid capital to Fund Online Korea as shareholders.
The FSC has indicated the funds supermarket will, in principle, be able to distribute all available fund products in Korea (up to 3,000 funds) through this online system.
The goal is to offer peer comparison to allow retail investors to choose what to invest in, and also to provide transparency over fees, which in Korea are charged on an annual basis
Further, the FSC has indicated that funds sold via the online system will not be allowed to charge fees upfront, and says the total cost of investing will be approximately a third of regular funds.
Industry sources, however, have recommended that independent financial advisers be included in the process if this entity is to be successful – a factor the FSC has yet to factor in.
“Based on the experience of the UK and Singapore, which have implemented similar systems, an IFA scheme must be well-established to provide fair and objective advisory functions,” said an senior insider.
Four fund ratings firms – Morningstar, Zeroin, KBP Fund Rating and FNGuide – have also put up cash. They will be expected to provide content for the supermarket.
Online Fund Korea’s oversight committee has Cha as president and CEO. He previously served as chief executive of Yuri Asset Management and Woori Asset Management, respectively. Its chairman is Cho Yong-byung, CEO of Shinhan BNP Paribas Asset Management.
The committee’s members include senior executives from Fidelity and Schroders, as well as from Zeroin, Kofia and local fund houses KB Asset Management, Korea Investment Management, KTB Asset Management, Truston and Kiwoom.
“The inclusion of Fidelity is significant,” a fund management executive has previously told AsianInvestor. “They have their own internet-based sales platform in other countries and can bring a lot of experience.”