Vanguard voices frustration over commission model

As Vanguard switches senior executives in Asia, regional head Shelly Painter points to the opaqueness of commission-based sales structures and calls for more disclosure.
Vanguard voices frustration over commission model

As several developed markets move towards greater fund transparency and fee-based distribution models, Vanguard is confident Asia will follow suit.

“Whether it’s soon or not, I don’t know,” said Shelly Painter, managing director for Asia. “We certainly do find clients in Asia that are fee-based, and who talk with us and use our products. But for the most part, very few distributors in Asia are interested in something like Vanguard because we won’t pay for distribution; so the end client will never hear about us.”

The firm last month launched three exchange-traded funds in Hong Kong – FTSE Developed Europe Index, FTSE Japan Index ETF, and FTSE Asia ex Japan High Dividend Yield Index products – bringing its ETF offering there to four. Its first Hong Kong-listed product, the Vanguard FTSE Asia ex-Japan Index ETF, went live in May last year.

“With mutual recognition, we feel like making the commitment to have locally domiciled products here in the same time zone for execution,” said James Norris, managing director of Vanguard's international operations. “Often people feel more comfortable investing under the auspices of their own regulator.”

And earlier this month the firm appointed James Martielli as head of its portfolio review group in Asia. Based in Hong Kong, he replaces Douglas Yones, Asia head of ETFs, who has relocated to the US as a senior product manager for Vanguard.

Martielli is responsible for new product development, product management, client engagement and capital markets in the region. He was previously a senior investment analyst on the oversight and manager search team in Vanguard’s portfolio review department in the US. There he had focused on quantitative equity, managed payout and fixed income managers and funds.

Commissions versus fees
A ban on commissions for funds not regulated under the Markets in Financial Instruments Directive (Mifid) in the Netherlands came into effect in January. The UK's Retail Distribution Review took effect at the same time, banning commission-based selling of investment products. Commission-based distribution in the US is also giving way to fee-based distribution, and Australia is moving in that direction too.

“In Hong Kong and across Asia there’s this statement that people like to make: Asian investors won’t pay for advice," said Painter. "But the fallacy is that they do pay for their investment advice. The commission goes to the guy sat across from the table at their bank, or there’s often a trailer fee."

Consumers are likely unaware of the arrangement, she added, pointing to the transfer of part of the management fee from the fund company to the distributor on retrocession.

“Most consumers do need financial advice. It should be a transaction between the adviser and the investor,” said Painter. "Today it’s all built into a product, and that’s not clear to the investor. Advisers that move to more fee-based approach really do like it. Their revenue stream is more predictable and they don’t have to sell a product every month for a commission."

James Norris

Further afield, Vanguard operates an office in Singapore, where it primarily uses intermediaries to feed offshore products to investors. And it has begun to work with clients in Taiwan.

“It’s a terrific retail market, but very limited to what you can do without a licence," said Norris. "We will look at opportunities to broaden in Taiwan."

In China, Vanguard maintains relationships with institutional investors.

“If there’s an opportunity in China to have a wholly owned investment company, that could change things quite substantially," said Norris. "In the meantime, we feel Hong Kong is a regional hub from which to do business, and it’s a great retail market unto itself."

In Japan, the firm started out with institutional investors, but is now working with a few strategic clients to grow assets under management. The firm runs 30 mutual funds and eight ETFs domiciled in Ireland.

It doesn't have locally domiciled products in Japan; rather, its strategic partners have created a fund from its Dublin-domiciled vehicles – the Saison Vanguard Global Balanced Fund. In addition, Japanese online brokers sell Vanguard’s ETFs.

But as it builds out through Asia, Vanguard could find liquidity an issue, as have other ETF providers.

“Every ETF is fighting for that liquidity,” said Norris. “But because we are using broadly diversified products, we think liquidity will be less of a challenge. They [our ETFs] are such core products we fully expect sufficient liquidity, particularly as the ETFs begin to build up. It’s a much bigger challenge when you are in narrow mandates or have more complex products.”

In the US and Europe, Vanguard is credited with putting pressure on competitors to reduce the costs of passive investing.

“Part of that is because of our own fee levels, and part of that is because we are going to focus on transparency of not just the management fees, but also the distribution fees,” said Norris. “Even if you don’t buy a Vanguard product, the result is the product you are in has lower fees, in the market place that’s good for investors.”

Across Asia, a number of institutions are moving large sections of their books to passive investing, said Painter. “They are balancing their private equity and other active products."

As of the end of March Vanguard managed $2.86 trillion in assets, of which $358 billion is in ETFs and $1 trillion is actively managed; $100 billion of it is managed for Asia-Pacific clients. That compares with market leader BlackRock’s $4.4 trillion under management, of which ETFs comprised $930.4 billion.

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