The trials facing Taiwan’s fund supermarket

Coming next month in Taiwan: a government-supported online fund supermarket. In a two-part article, of which this is the first segment*, AsianInvestor analyses the challenges the initiative must overcome if it is to gain strong traction.

In the island’s competitive and fickle fund distribution market, the ability for investors to pick and choose their funds online would seem a no-brainer. Yet local players are not convinced it will work.

There is good reason for such cynicism. Taiwan’s predecessor, South Korea, failed to get much traction for a similar platform called Fund Online Korea (FOK), which launched in 2014. In fact, online fund distribution has failed to really take off anywhere in Asia except China, said Ivan Han, senior analyst at research firm Cerulli Associates.

At the end of 2015, the proportion of mutual fund assets being sold through third-party online channels stood at 17.2% in China, but just 6.2% in Singapore, 2.4% in Hong Kong and 0.3% in Korea, according to Cerulli data.

Red tape is restricting the ability of online fund buying to proliferate, plus there are very few independent financial advisers (IFAs) to help either. Another obstacle is that local bank distributors are said to be trying to stand in the way of such a platform taking off, more details on which will appear in an article tomorrow.

For Taiwan, solving the issues that stymie online fund distribution is pressing if its plan is to succeed.

Government support

Taiwan’s markets regulator, the Financial Supervisory Commission (FSC), has two reasons for launching an online funds supermarket.

First, it wants to burnish the country’s credentials as a financial technology hub, as reported. Second, it is keen to encourage diverse distribution channels to curb local banks’ improper sales activities, including fund churning.

The platform will be run by Fund Rich Securities, a joint venture between the Taiwan Depository & Clearing Corporation, the Taipei Exchange and fund managers.

Rosemary Wang, deputy director-general, of the FSC’s securities and futures bureau, told AsianInvestor that the regulator was keen to develop a reliable fund trading environment. She said the watchdog saw the supermarket as one way to crack down on improper sales activities and bank distributors’ conflicts of interest with investors.

It’s been common for the banks in Taiwan mostly to promote funds that offer them the highest distribution payments, and also to churn client assets into new funds for more fees, a senior executive at a foreign fund house operating in Taiwan told AsianInvestor.

Bank’s relationship managers tend to call clients as soon as their fund’s value goes up, say, 5% and tell them to take profits and change to another product, he said.

Turnover rates of Taiwan’s offshore funds are about two to three times those of long-bias mutual funds (excluding money-market funds) in the US, said Donna Chen, founder and president of Keystone Intelligence.

The turnover rate for Taiwan onshore funds was 92% and 100% for offshore equity funds in 2015, versus 28% of long-bias mutual funds excluding MMFs in the US, according to Keystone.

Road blocks

In principle, the online supermarket offers a broader and more transparent array of products than banks do, and reduces distribution costs for both retail investors and fund managers.

Yet local players don’t believe the online fund platform will quickly gain popularity among investors in Taiwan, pointing to the experience of Korea’s FOK. The supermarket offered retail investors 95% of the total funds available in the country by June 2015, yet only 43,900 people – 0.28% of Korea’s fund investors – used it, according to Taipei-based E.Sun Bank.

Cerulli’s Ivan Han said Korean investors had retained their preference for face-to-face interaction.

Still, there are things to learn from FOK, such as the importance of having a user-friendly website, he noted. A key issue with Korea’s platform is that it was too comprehensive: the site has thousands of funds on its website, and the sheer quantity of options has intimidated and confused would-be fund investors.

IFAs and robo-advisers

Plus Korea’s retail investors had nobody to turn for advice. “[Retail investor confusion over the supermarket] is complicated by a lack of an IFA industry in Korea to support investors,” Han said.

An IFA’s job is to help investors sift through available fund options and pick the ones that best suit them and are the cheapest. But advisers, like banks, can be vulnerable to the temptation to push products generating the highest fees, though at least they can pick from the entire universe, whereas banks typically sell only a few fund managers’ vehicles.  

While more IFAs in Taiwan could help with the take-up of online platforms, so might developments in the robo-advisory space. Robo-advisers would help because they are very cheap, offer easy-to-understand products and are designed to be simple to access. 

Governments in some Asian countries have realised the positive impact of a well-regulated IFA industry and are making efforts to promote such a development.

In a paper issued in December 2015 to discuss how to strengthen Hong Kong as a retail fund distribution centre, Hong Kong’s Financial Service Development Council admitted that no significant IFA industry had developed in the city, unlike in the UK and US. It also called for the bolstering of fund distribution channels other than banks.

Meanwhile South Korea, the pioneer of online fund distribution in Asia, plans to launch its IFA services on FOK this year.

*The second part will run in the coming few days.