A startling rise in the number of investment advisory firms setting up shop in Korea this year has heightened concerns that growing competition could be detrimental to the nation’s asset management industry.
The past four years have witnessed a 74% increase in such companies to 129 as at August this year, from 74 at the end of 2006.
While the average annual growth rate has been 10% over this period, the past two years have witnessed a sharp acceleration. A total of 16 such firms were set up in 2009, and a further 21 have already been established this year, according to the Korea Financial Investment Association (Kofia).
By contrast, since the end of 2006 just 18 asset management firms have been established, taking the overall tally to 71.
There are two tiers of investment advisory firms in Korea: those that cater to high-net-worth individuals (HNWIs) and institutional investors; and those that deal with the retail community. Predominantly these firms invest in the domestic stock market for their clients, seeking alpha.
However, unlike asset management companies, investment advisory firms are not allowed to manufacture or issue fund products to retail investors. As such they do not have a retail distribution network, and therefore are subject to less strict regulation.
Several reasons have been put forward to explain the proliferation of these firms over the past two years.
The Financial Investment Service and Capital Market Act of February 2009 halved the level of paid-up equity capital required for advisory firms with discretionary mandates to $1.25 million, while it also reduced the number of eligible professionals needed at each firm to two, from four.
Generally the requirements for establishing an advisory firm in Korea are considered far less stringent than they are for asset management companies.
There has also been a recent increase in wrap-account business among brokerage firms, which offer these private accounts to their clients and often outsource investment management responsibility to boutique advisory firms in an effort to generate higher returns.
“Many retail fund investors who were disappointed by local asset management companies’ performance have been turning to investment advisory companies for more bespoke investment styles with potential extra returns,” says a source from Kofia.
However, Kofia is concerned that the growth of investment advisory firms is raising competition to the point where the industry standards could become compromised.
There is also a market concentration issue, with the top five investment advisory firms enjoying a 45% market share as of March this year. Plus, the fact that most of these firms predominantly invest in local stocks means that they are subject to a large degree of market risk and volatility.
Investment advisory companies had $15.6 billion in assets under management (AUM) at their peak in 2007, but this sank to $9.9 billion in 2008 as a consequence of global liquidity problems. As of June this year, AUM had risen again to $11.5 billion.
By comparison, the asset management industry saw AUM peak at $289 billion in 2008, but fall to $266 billion in 2009. It stands at about $264 billion at present.
The Financial Supervisory Service has pledged to provide more comprehensive internal guidelines for the industry on portfolio and risk management in order to better protect investors.