Asia Pacific’s fund industry is facing a crisis of confidence.
Across much of the region, investors don’t trust that their investment managers are putting their interests first. As Australia’s scandal centring on AMP and Commonwealth Bank of Australia reveals, they may be onto something.
The Sydney-based asset manager fell into trouble after it emerged it had deliberately charged thousands of retail customers for advisory services over three months, despite not supplying the service. Worse, company management admitted they misled Australia’s financial watchdog, the Australian Securities and Investments Commission.
The scandal already led chairwoman Catherine Brenner to resign on April 30, while Australia’s big four banks and AMP agreed to reimburse A$216 million ($163.2 million) to over 300,000 affected customers.
The furore over AMP serves as a chilly reminder there are many issues with investing, even in supposedly sophisticated countries. The world’s asset management industry remains under pressure from the rise of passive funds. Their miniscule fees have laid bare the poor performance many supposedly active funds, which has pressurised active fund managers to consolidate.
To distribute their products, fund managers have looked to retail banks and financial advisers. Both have their problems. Banks charge heavy fees (often 3% of committed assets) and often prioritise fund products that net them the most money, not meet client needs. Financial advisers are meant to be more client focused, but as AMP’s court case revealed, while the number of advisers working in Australia has grown from 18,000 to 25,000 over the past 10 years, many lack relevant university degrees.
There are similar concerns over the quality of financial advisers in other places. A CFA Institute and Greenwich Associates survey released in April found that just 30% of Asia Pacific retail and institutional respondents believe financial advisers put their clients’ interests first. This fell to a lowly 7% among Hong Kong respondents.
Nick Pollard, CFA’s Asia-Pacific managing director, blamed the territory’s low score on “low transparency around fees, poor or inappropriate product recommendations and less than satisfactory levels of ethics of investment advisers”.
This deficit of trust has happened in large part because funds and banks prioritise profits over client need. They do so because, by and large, nations in the region don’t require them to put their customers’ investment needs first, or even have minimum qualifications.
In fairness, Asian investors have been willing to play along too. Many retail fund buyers prefer to pay one-off fees for each investment rather than pay an independent financial adviser an annual advisory fee for proper fiduciary advice.
But the general scepticism around advisers, interspersed with scandals such as AMP’s, leaves Asia Pacific’s fund industry vulnerable. Either it needs to improve its client service—or face disruption.
And the disruptors are on their way. Robo-advisers have already begun to proliferate; Malaysia’s regulator, for example, appears set to distribute its first robo-adviser licences in the coming few months. Their total assets under management are small, but this will change as they move from exchange-traded funds into more active forms of portfolio investment. Technology adviser IDC Financial predicted in November 2017 that robo-advisory AUM in Asia Pacific would rise from $30 billion in 2017 to $500 billion by 2021.
The technology companies creating such services are likely to see investors disappointed with their current service as a ripe opportunity. Meanwhile, existing investment managers and advisers have a narrowing window to regain their customers’ trust. They might be well advised to volunteer to work with regulators to raise the standards of investment advisers and fund salespeople in banks too. Introducing minimum relevant education standards would also make sense.
Alternatively, Asia Pacific’s fund houses, banks and investment advisers could keep exploiting their investors. In which case, look for more fund closures and consolidations—and more scandals.