Good investment advice is lacking in Asia, says Cerulli

Investment advice in Asia still lags well behind that in regions such as Europe and the US, and improving it would help boost confidence in mutual-fund products. Such is the conclusion of the second-quarter edition of The Cerulli Edge: Asia-Pacific report.

Moreover, not only have tighter rules on the sale of investment products hit volumes, they have also hindered the development of a stronger advisory culture and are likely to increase costs for distributors.

"Fund sellers might even eventually seek to repair their positions by demanding more of the fee pie from asset managers," argues US research house Cerulli Associates.

The report looks in detail at Japan, Singapore and South Korea and finds that while investor protection is improving, the provision -- and demand for -- better advice remains some way off. For example, independent financial advisers (IFAs) account for less than 1% of distribution in Asia. The most developed IFA sectors are in Hong Kong and Singapore, but neither can rival the US, for example, for penetration in this space.

Mutual-fund penetration across the region certainly needs a boost. In Asia including Japan, penetration almost doubled from 3.3% in 2004 to 6.5% by 2007 and, stripping out Japan, it shot up from 4.6% to 12% over the same period. But then the crisis reduced the Asia including Japan figure to 4.4% and the ex-Japan figure to 6.8%. Given that global mutual-fund penetration in 2008 was 16%, Asia has a lot of potential as it plays catch up, says Cerulli.

But tighter laws are proving a hindrance. Regulators have sought to impose investor-protection rules over the past couple of years thanks to a lack of demand for good advice and a distribution structure dominated by commission-driven sales forces. Most jurisdictions -- China, Hong Kong, India, Indonesia, Singapore, South Korea and Taiwan -- have imposed stricter rules, and others, such as Malaysia are Thailand, plan to follow suit.

And many of the regulatory moves have had unintended effects. For example, India's bold banning of front-end loads simply meant distributors switched to products paying higher commissions (see AsianInvestor magazine's March issue for full details on this); Taiwan's tighter focus on structured products handed an advantage to funds; and tougher distribution conditions in Singapore led to at least one global manager focusing its fundraising efforts elsewhere for 2010.

Elsewhere, South Korea now has one of the most prescriptive regimes in the region, following the enactment of the Capital Markets Consolidation Act (CMCA) in February 2009, says Cerulli. A major concern, says the report, is that the rules could be too conservative. The sorting of investors into five categories depending on factors such as their investment experience and risk tolerance could mean that they are left with less risk than they are comfortable with. Equity funds, for example, would be ruled out for many, unless they sign appropriate indemnities to circumvent the CMCA and take full responsibility for their decisions.

This appears to have had a negative effect on fund flows in South Korea; there were net outflows of W30 trillion ($26.8 billion) from funds in 2009. Having said that, securities houses and insurance companies have seen growth in mutual-fund sales volumes, the former group particularly in the first half of last year and the latter since 2007.

Meanwhile, there remains a gap in the South Korean market for good quality advice. Efforts to introduce an IFA channel have not yet led anywhere, adds Cerulli, and few banks have chosen to provide chargeable advisory services, despite being allowed to do so under the CMCA.

But certain developments are encouraging distributors to shake off their complacency. For example, from the start of 2010, investors have been able to switch distributors without any cost, which has put the onus on sellers to improve after-sales service.

In Japan, the picture is somewhat similar, perhaps to an even greater extent. After falling to Y43.2 trillion ($481 billion) in December 2008, Japan's mutual fund AUM recovered to Y47.4 trillion by December 2009. Fund penetration is low, but a vast pool of money lies in bank deposits.

Cerulli says this is partly down to a lack of good quality investment advice in banking and brokerage channels. The firm's survey shows that distributors in Japan feel that by far the most important factor for driving fund sales is 'providing better advice', followed by increased open architecture and retirement demand. The aim of the survey was to gauge the impact of the Financial Instruments Exchange Law (Fiel), enacted in late 2007 to boost investor protection.

But while the distribution network understands the importance of good investment advice and has made incremental improvements in this area, it "lacks the skills to deliver substantial further improvements", says Cerulli. And uncertainty about the financial climate has deterred firms from boosting the competency of their sales teams. Only minor adjustments to the quality of the sales process were reported, such as quicker and more in-depth responses to customer queries.

A similar pattern was evident in the managed-account sector, even though it should, in theory, be offering better guidance, says the report. Japan's largely fee-based managed-account programmes should be open to delivering high-quality advice, it says.

A major issue banks and brokerages face in this regard is that Japanese investors still do not view advice as a service worth paying for.

Still, it does seem that Fiel has helped edge the country towards better investor guidance, according to the survey. When asked to rate the outcome of Fiel, distributors gave the higher scores to better investor protection, client profiling and the quality of advice provided by sales forces.

However, ultimately, Fiel is much more of an investor-protection law, designed to curb mis-selling, than a proactive measure intended to boost investor guidance, says the report. One reason for this is that the improvement that distributors have in mind under Fiel is very basic, such as explaining more fully what an investment is. "This falls far short of holistic, client-orientated financial planning that can underpin trust in collectives," says Cerulli.

Meanwhile, the regulatory change under way in Singapore -- to tighten distribution rules for investment products following the Lehman Brothers debacle -- is a "knee-jerk reaction to the structured products fiasco". It could clog up mass retail distribution channels, adds the report, with at least one global player saying it is focusing its flow-raising efforts elsewhere in Asia this year.

On the plus side, bank intermediaries in the Lion City have tightened sales practices and strengthened compliance standards as a result of the new rules. They have also increased training efforts for product sales staff. In addition, the practice of using gifts as incentives to attract customers to investment products has been cut back or dropped altogether, while the term 'capital-protected' has been banned.

However, the remuneration of sales staff seems to have undergone only cosmetic changes, with these employees still largely driven by commissions.

By contrast, Singapore's IFA sector has shown a tendency to increase oversight of individual advisers and move away from a commission-driven pay structure to one with greater emphasis on fees derived from advice and AUM, says Cerulli. Nonetheless, the higher level of regulation is likely to spark consolidation due to higher costs for the IFA sector.

Asia's investor-protection rules are welcome to the extent that they help repair and boost long-term trust in mutual-fund products, concludes the report, but they "fall far short of a proper push towards higher-quality distribution".