Korea’s IFA challenge

The launch at the end of this month of Fund Online Korea – an industry-owned platform to sell mutual funds online at a third of the management fees charged by banks and brokers – is a potentially exciting development.

But it won’t get far without the introduction of independent financial advisers. And even then, questions remain, as noted last week by AsianInvestor.

Korea's asset management industry, six years after the 2008 market crash, continues to suffer net redemptions. Industry AUM stood at $282 billion at the end of 2013, down from a 2007 peak of about $300 billion. The average fund size is a paltry $28.6 million, riddling the market with thousands of unprofitable vehicles.

Most of these are bond funds for corporate investors, on which fees are pitiable. The products that generate revenues for managers – international and equity funds – have experienced net redemptions for six years in a row. Yes, six years.

That’s because the bulk of these assets were raised from retail investors during the emerging-markets boom of 2006-07. Mirae Asset’s Insight Fund, disastrously launched in October 2007, epitomised the trend. Schroders’ Bric fund and Shinhan BNP’s ‘Bonjour’ China series were major winners of the period.

Investors who invested in 2007 are still under water today, although Jeon Kil-soo, Schroders’ Korea head, says the number of boom-era clients remaining in his firm’s Bric product is now very small.

The problem, he notes, is not that people lost money and have redeemed. The problem is that no new investors have entered the equity funds space since.

The big fund managers that are affiliates of banks, brokers and insurance companies have not had an easy time. But they have powerful distribution partners. There is no correlation between distribution power and fund performance or quality. Korea’s smaller and independent fund managers have endured plenty of pain.

Schroders, for example, still boasts pole position for international equity assets, and has a $5 billion business on shore. But in 2007 it had a $13 billion business. Mirae Asset’s AUM, once over $100 billion, is now $58 billion.

Investors and intermediaries have lost confidence in equity funds – and in the local stock market. The Kospi 2000 index, since recovering from a 2008 swoon, has range traded between 1,700 and 2,100. Whenever it nears the top of this range, retail investors sell, overwhelming whatever fundamental long positions foreign institutions may have put on.

Thae Khwarg, Korea CEO at Baring Asset Management, says that while the introduction of Fund Online is welcome, it is unlikely to change investor behaviour – at least not without the development of advice-based distribution.

Fund executives say the Financial Supervisory Commission wants to have IFA licensing rules ready this spring, with the first ones handed out in June or July. But it has moved cautiously out of fears of mis-selling, and also from alleged opposition by big banks and brokers that potentially have something to lose.

While it’s unrealistic to expect an IFA industry to blossom overnight, any progress would be important – not just for Korea, but for Asia, where fund distribution everywhere remains stuck in an outdated ‘IPO’ model of churn, dominated by a handful of banks or brokers in each country.

Khwarg says there is a potentially large pool of people who could qualify as IFAs. These include bank branch salespeople, brokers, accountants and insurance agents; and, at an institutional level, perhaps investment advisory companies, which could restructure their retail fund sales around an advice-led model.

Even so, the idea of equity funds has been tarnished in Korea. Unless people get excited about their own companies, it is hard to see them flocking to funds. And while Fund Online will offer identical products at one-third the fees – and with tax breaks for young, low-income people – that may not be enough.

The one product that has sold well in Korea is exchange-traded funds, particularly the inverse and leveraged ETFs sold by Samsung Securities. These allow people to take short-term punts on the index: the perfect tool for those who want to range trade, rather than invest in corporate prospects.

So even if the government creates licences for qualified IFAs, there’s no guarantee that they will pursue a true advice-led business; examples in Hong Kong, for example, suggest that without scale, IFAs end up pushing high-margin products. Can they suggest funds to be bought online at deep discounts and still maintain a viable business?

Probably not unless the domestic stock market takes off. With Abenomics driving down the value of the yen, however, Korea’s corporate champions are under more pressure than ever. Many chaebols are being forced to restructure. That bodes well for their long-term health, but it may be some time before improved performance is reflected in share prices.