Cerulli laments the dominance of banks in fund distribution

The research firm says banksÆ wealth management activities are mainly motivated by generating fees through transactions; a reality that discourages investors from seeking meaningful advice and prevents fees from coming down.
AsiaÆs fund management industry has made great strides in terms of development over the past five years. But Shiv Taneja, Singapore-based managing director at research firm Cerulli Associates, says there is one aspect that hasnÆt kept pace with the progress and that is fund distribution.

Banks continue to dominate the channels of fund distribution and it doesnÆt look like that trend will change in the coming years. In the first instance, having banks actively push funds as part of an overall wealth management service was positive in the sense that it encouraged more people to transfer money from deposits into collective investments and it aided in the penetration of the market.

However, the fact that banks continue to crush other channels of fund distribution has been counter-productive to the overall industry, says Taneja.

TanejaÆs work in Cerulli, a Boston-based research firm specialising exclusively in financial services, focuses on the Asian retail and institutional asset management industries, with specific emphasis on product development and distribution trends.

At this stage, banks should already be helping build the advisory model, but thatÆs where ôbanks have really failed spectacularly,ö Taneja says.

ôThe truth of it is the business model for banks is that of transaction. They are not inherently set up to provide financial advice, not set up to be advisers in the UK-context or the US-context,ö he says. ôIf you look at continental Europe û in Spain, France or Germany û the model there is similar to Asia. The big difference really is in Asia, there is a high tendency towards trading, which is a cultural thing. That is also something that has been actively supported by banks largely because of the revenue models that they have.ö

Any progress to break the dominance of the banking channels should be welcomed, Taneja says.

In markets such as Singapore, independent financial advisors (IFAs) are starting to take a little bit more of the share of fund distribution, at around 10%-15% of the total. In Malaysia, certified unit trust advisors were in the past only allowed to distribute funds, but not give advice. Now, they are allowed to give advice and carry out the transaction.

ôDespite the small step that IFAs are taking, there is no question that in the foreseeable future, banks will continue to dominate because increasingly they are going to pressure fund management companies to commit to them,ö Taneja says. ôIf fund management companies want to use the banksÆ distribution channel, banks would require a significant share of the assets.ö

Breaking the banksÆ dominance may be easier to achieve now that more insurance companies are stepping up as distributors of investment products.

ôFor the next five years, one of the most important developments that we will see is the role of insurance companies in distributing unit-linked products alongside their traditional insurance products,ö Taneja says.

In the past, the definition of the roles of fund management companies, banks, and insurance companies was very clear. Fund management companies manufacture products, banks distribute the products, and insurance companies sell insurance. The relationship among the three has changed quite dramatically in recent years and there has been a marked intermingling of roles.

Insurance companies not only own banks and asset management companies but they also sell investment products. Banks own asset management companies and are getting very involved in the insurance business. They all compete and collaborate at the same time.

ôThat collaboration, from a distribution standpoint, is going to be very important when we consider what the landscape is going to be like in the next five years,ö says Taneja.

The widening of the distribution channels for funds would not only improve the advisory aspect, but would also bring fees down.

Asia has so far adopted the Anglo-Saxon model, whereby investors tend to take a do-it-yourself attitude when it comes to their first $100,000 of investment. When the investment amount becomes significant or meaningful in relation to overall net worth, thatÆs when some investors in Asia tend to seek advice.

The advisory model has not completely worked in Asia, for various reasons. One such reason is the absence of onerous tax structures in this region, which have been among the prime motivations for seeking financial advice in the US and in the UK.

Fund advisory has been largely centred in places such as Australia, the UK, the US, and to some extent continental Europe because of high taxation in those countries. Investors there have turned to financial advisers to ask them how they can invest while minimising their tax legally.

ôHistorically in Asia, we have not had this problem,ö Taneja says. ôWhen you have a low tax market base, people donÆt think about this issue. What people here tend to do is invest in property and then speculate.ö

In the West, markets that developed first in terms of fund management have been the markets where people were conscious about saving for their retirement. It was only after they got used to the idea of saving, such as through the 401K plan in the US, that they started investing heavily in mutual funds.

ôIn Asia, we went back-to-front. ItÆs only in recent years that we have seen the development of a non-government sponsored or corporate retirement plans. Apart from that, investment has been largely speculative or personal,ö Taneja says.

Another reason why financial advisory hasnÆt flourished in Asia involves culture.

ôIn the west people are perfectly happy to relinquish control to advisers,ö Taneja says. ôIn Asia, they tend to want to manage and control their investments. The role of a private banker in Asia is essentially that of a bag man, in the sense that they are figuratively carrying your bag. This is changing so slowly on the margin.ö

With banks dominating the distribution channels, fees are likely to stay high in the next five years.

Ideally, the fund management industry should operate in an environment where there are no front-end fees, Taneja says, noting that front-end fees in Asia have been steep at around 5% of assets or higher.

Distributors should be compensated, but not upfront, he says, adding they should be compensated only if they are giving meaningful advice. Fund management companies that use the banking distribution channel get nothing from the front-end fees.

ôBanks say the upfront fee is used to pay for the expertise that they have. But what they are not saying is it really pays for the expensive offices they have and for other things that have no relevance to the investment process,ö Taneja says. ôIf all they are doing is transacting money on an investorÆs behalf, they should just charge a specific fee to do that.ö
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