Senior private bankers in Asia have expressed surprise that commission-free distribution is not being discussed more in the region.
The trend globally is moving towards a banning of commission payments to distributors to prevent product churn, combined with a fee-for-advice system.
The UK and Switzerland have implemented rules on the back of a Retail Distribution Review, to introduce clarity over the way investors pay to receive financial advice and the services they can expect.
Both markets have banned commissions and compelled fund houses to be transparent about retrocessions paid to banks.
But Kenneth Ho, deputy global head of the investment solutions group and head of products for Asia at Julius Baer, told a private banking roundtable*: “I am surprised we have not heard nearly as much in Asia about releasing this information to clients."
Australia is leading the way in Asia Pacific, having implemented Future of Financial Advice reforms to tackle conflicts of interest and engender greater trust in the financial planning sector. These became mandatory from July 1 this year.
The Monetary Authority of Singapore (MAS) has not introduced a commission ban yet following its Financial Advisory Industry Review. While MAS evidently wants to move towards greater transparency, it has made it clear it does not see anything wrong with collecting retrocessions.
Meanwhile, Hong Kong’s Securities and Futures Commission (SFC) has carried out thematic reviews and highlighted shortcomings in the sales process, although nothing formal has been introduced.
“I think the trend we conclude is that retrocessions will not disappear [in Asia] in the short term,” says Rene Buehlmann, global head of investment funds for UBS Wealth Management, noting that the goal of regulators appears to be transparency over retrocessions rather than outright bans. “But if you look ahead five or 10 years, the trend will probably go towards a flat advisory fee.”
He notes that UBS has introduced retrocession-free share classes on discretionary mandates, while adjusting its fee schedule accordingly.
“For an advisory flat fee we are still collecting retrocessions, but we are transparent about it,” he says, noting that UBS plans to launch an advisory-fee model early next year.
“Personally, I think if you introduce a fee-for-advice, you need to offer something in addition. You need to package it either with additional services, additional monitoring or the regulatory playing field becomes equal, as in the UK.”
His point is that people in Asia will be reluctant to pay for financial advice when they have been getting it for free, at least until the landscape changes and everyone charges for advisory services.
“You need to package it as something that is an additional service, then it might take off,” notes Buehlmann. “I am not saying it will sell like hot cakes, but I think it will be an education process for clients to come in gradually.
UBS ony recently launched its flat-free offering, committing itself to monitor portfolio quality systematically while allowing transactions at no cost. It says clients have been receptive so far.
“I am positive that over time we will see more appreciation for it [paying for advice] in Asia, but it is our job to highlight the added-value it creates.”
Tony Stanton, head of investments for LGT Investment Management (Asia), agrees that the focus needs to be on transparency.
“Most clients recognise there is a cost to doing business and there are bona fide fees that need to be charged,” he observes, pointing out that fee-based models in other parts of the world have worked with varying degrees of success.
He suggests there is a compelling story for a fee-based model when client assets go up. But he also points to the flip-side when it comes to a buy-and-hold strategy.
“Then people start to question the existence of fee-based charges in light of lower trading activity,” Stanton adds. “In most cases I do not think they would be receptive to being charged an additional advisory fee on top of the retrocessions charged. In Asia, I think it would be very difficult facing our competitive environment to try and tack on an additional fee for quality of advice.”
* AsianInvestor’s second annual Private Banking Roundtable was published in full in our November magazine edition. Sponsor Aberdeen Asset Management participated as a silent observer.