Industry welcomes move to open China fund distribution

Fund managers and prospective independent financial advisers in China have welcomed the regulator’s move to allow new players to enter mutual fund distribution in the country.

Last week, the China Securities Regulatory Commission (CSRC) revealed that from October 1 it will allow independent financial advisers (IFAs) and foreign banks to enter the sector, which at present is dominated by domestic banks. Discussions have been ongoing since last November.

And AsianInvestor has learned that a wide array of financial services organisations including wealth management advisory firms, investment consulting agencies, market data providers and funds of funds are preparing to apply for distribution licences.

The revised measures for the administration of sale of securities investment funds will allow individuals with professional qualifications to establish an IFA firm for the first time. The minimum number of staff at each distributor required to have a securities qualification will also be cut from 30 to 10.

Nevertheless, the CSRC has set a high barrier of entry for setting up an IFA business, requiring minimum registered capital of Rmb20 million ($3.1 million) – far higher than the Rmb5 million published in last year’s draft proposal.

Ben Yang, chief executive of consultancy Howbuy – expected to be among a number of firms applying for the initial batch of distribution licences – says: “This indicates the regulator has taken into account that the initial investment in fund distribution business is going to be tremendous and expects institutions and individuals with sound financial strength and risk-bearing capacity to enter this business area.”

Prospective IFAs acknowledge that increased competition will make mutual fund distribution a tough arena to start up in, but view this as good for the long-term development of the industry.

Adam Li, a partner at prospective IFA Beijing Surfways Wealth Advisory, notes: “There will be a well diversified and interesting composition mix in the future IFA landscape in China. This is going to be healthy for the whole fund industry.”

Yang expects to see a large number of IFAs emerge, and says this will motivate fund management companies (FMCs) to pay more attention to customer satisfaction and product innovation. It should also challenge FMCs to solve chronic problems such as churning and “giving priority to IPOs but neglecting sustainable sales”.

In addition to IFAs, foreign banks in China will also be allowed to distribute funds. While large domestic banks (especially the big four: ICBC, Bank of China, China Construction Bank and Agricultural Bank of China) will continue to enjoy a key advantage in terms of branch network, size of retail customer base and depth of deposit pool, the revised regulations allow new distribution players to charge a value-added service fee to end-clients. This will enable them to offer customised, one-on-one services to help them to prosper despite their competitive disadvantage.

Steve Lee, chief executive of HSBC JinTrust FMC, doesn’t expect IFAs to bring a significant number of clients in the early stages. “I believe IFAs who manage to establish themselves will be in niche markets. They will be like smaller private banks in Europe, focusing on a niche market of private, high-end customers.”

He points out that the success of the business model will depend on how well these firms target their customers. “There is a lot of investment to be made to target the high-end customers and a lot of service propositions need to be ready to roll out,” he adds.

Surfways has been targeting such high-end customers. Established in 2005, the company has built a customer base of more than 3,000 with a minimum net worth of Rmb1 million.

“Our positioning is to be a wealth manager for high-net-worth individuals,” says Li. “We offer asset allocation services and help our members to achieve expected returns.”

This business model enables the firm to have two streams of revenue – both membership and placement fees.

“Since mutual fund distribution is a low-margin business and it is risky for a small organisation to be engaged in such a game of scale, we will not position ourselves as a placement agency,” adds Li.

AsianInvestor published an in-depth article on the likely impact of regulatory change to China’s mutual fund distribution arena in our June 2011 magazine edition. To view the article, click here.