Fund veterans argue for retrocession ban in HK

Fund industry veterans say they support the idea of a ban on sales commissions paid by fund houses to distributors, arguing that such payments hinder the provision of independent advice.

Tobias Bland, chief executive of Hong Kong-based asset manager EIP, told AsianInvestor he supported a total ban, rather than merely the greater commission disclosure recommended recently by Hong Kong's Securities and Futures Commission (SFC).

If retrocessions were to remain in place for the long term, he noted, they would be a “huge barrier” to the shift to independence. Banks’ monopoly on distribution – they account for 90% of fund sales in Hong Kong – looks hard to break, he added, and “the SFC is the only one that can do it”.

Another industry veteran – Jessica Cutrera, managing director at independent asset manager Capital Company (formerly EXS Capital) – was less forthright about banning retrocessions, although she does feel the best advisory model is fee-based rather than commission-based. Moreover, she expects to see fee-based advice continue to gain momentum.

Their comments have come as the debate intensifies on fund fee disclosure, with the industry awaiting final guidelines from the SFC on investment product fees and commissions.

EIP, which runs exchange-traded funds and hedge funds, is fully in favour of the independent adviser model. Retrocessions are not paid by ETF providers, meaning distributors do not have incentives to sell them under a commission model.

Conflicts of interest

Bland welcomed the first phase of the SFC’s proposals, which in November recommended greater disclosure. But he argued for a total ban on retrocessions, on the basis that the varying levels of commission payments paid by product issuers create major conflicts of interest for distributors and advisers.

He pointed to the consolidation of “very average bulge-bracket asset managers that have only historically been gathering huge assets because they’ve been paying 3-5% trail fees”.

Banks and larger asset managers in Hong Kong were reluctant to discuss the subject of product commissions and transparency. AsianInvestor’s requests for comment on the SFC’s recent paper were met with silence from the major banks.

This is to be expected, said Bland (pictured left). “Of course the big distributors are tight-lipped, because they are making $2.5 billion a year out of the Hong Kong market – it’s a massive earner for them all."

Banks will argue that they need these fees to cover the high cost of advertising, marketing and distribution, he noted. “The reality is that between the low cost and efficiency of ETFs, and the internet for marketing and subscriptions, having shopfronts is not a massive cost or even a need.”

He cited China as an example, noting that $250 billion a month of new fund subscriptions were done via the web. 

The experience in other markets shows how a shift can be achieved. Cutrera said that in the US close to 40% of all financial advice is provided via fee-based models.

The same may happen in Hong Kong, but it is generally expected to take quite some time. A market where most financial products are sold by independent advisers in Asia still looks far off.

The right direction

But momentum is gradually building on this front. The Association of Independent Asset Managers (AIAM) was set up in Hong Kong a year ago by a group of like-minded wealth managers, including Cutrera; Harmen Overdijk, managing partner of Caidao Wealth; and Riccardo Lehmann, managing director of Swiss-Asia Asset Management.

The association now has 16 member firms, which provide asset management services to families or wealthy individuals and, in some cases, the mass-retail segment. They typically use a third-party platform for custody.

Cutrera (pictured right) is confident the independent advice model has a bright future and that regulators will continue to push for transparency of fees. But she understands the reluctance to ban commissions outright: “They want to have better fiduciary responsibility and transparency, but there needs to be a path.”

She was unsure whether robo-advice was the answer, citing concerns about the securities robo model over whether investments being recommended were appropriate.

But even as the financial technology market grows, independent advisers can take non-private banking clients and, “for the right relationship”, set up small accounts and create a model exchange-traded fund portfolio quite efficiently, she said.

The focus of AIAM is on alignment of interests and transparency, added Cutrera, but member firms have different compensation arrangements and investment strategies. EXS Capital is fee-only, and she said she felt very strongly that this business model was the best for alignment, but that’s not where the whole industry is.

Still, AIAM takes the view that a commission model is fine as long as there is full agreement and disclosure to the client. “For many Asian families, that is still the arrangement they prefer,” said Cutrera.

She saw the move by global regulators towards more transparency – or in some cases banning of commissions – as instrumental in promoting better disclosure and improving how people engage with their advisers.