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The end of the road for free advice: expert

The end of the road for free advice: expert

By Armin Choksey, asset and wealth management market research centre leader, PwC Singapore

 

Since the global financial crisis, regulators around the world have stepped up their efforts to increase transparency, especially in the area of financial product sales.

Traditionally, investment advisers have handed out free advice in return for sales. However, this model’s days are numbered as the asset and wealth management industry shifts from a free advice/commission-based model to a flat-fee model.

Although this transition will inevitably result in compressed revenue – especially in Asia, where private banks derive a large chunk of their revenue from such transactions – all is not lost. It is worth noting that although fees are flat, they are often applied in a tiered fashion.

Although this structure is not a long-term solution, it should provide some reprieve in the interim, especially when banks are facing formidable regulatory pressures to make the shift.

Rules have already been implemented to ban commissions for financial products in some economies such as the UK, Netherlands and Australia. Meanwhile, private banks with European origins will soon experience a seismic change in the way they interact with European Union clients as the full force of MiFID II is realised. Switzerland, meanwhile, has taken a gentler approach by mandating the disclosure of trailer fees.

Changes hit home

Though radical regulations have yet to hit this part of the world, authorities in economies such as Singapore and Hong Kong are increasingly emphasising the disclosure of monetary benefits, particularly for banks as they are the main channels of product distribution.

In Singapore, following a string of bond defaults in 2016, private banks have been required to report all charges from product sales, and are required to present clients with a complete fee schedule during their onboarding phase.

In addition, trailer fees received from investments in discretionary portfolios also have to be disclosed. As for intermediaries in Hong Kong, they have been disclosing monetary benefits from product sales since 2010. While fees are generally made known, the authorities are looking into ways to standardise disclosures, starting from trailers retained from retail investment fund sales.

Given that most Singapore and Hong Kong banks operate internationally, they also face the implications of differing regulations across jurisdictions. The need to comply with new regulations, provide new fee schedules, train front-line staff and educate clients has undoubtedly increased costs for banks in Singapore and Hong Kong.

It is therefore hardly surprising that private banks in both economies have been actively steering clients towards managed solutions, which provide more clarity on charges. Unlike a transactional model where clients pay for trades, those who park their money in managed accounts – both advisory and discretionary – pay a fixed management fee that forms the bulk of their investment costs.

How to sell advice

There are advantages and disadvantages for clients, depending on how frequently they transact. Those who transact more will be getting more value for their money (or advice) than those who transact less. Convincing clients to jump from free advice to paying for advice is an uphill battle, but it needs to be done.

Private banks have started encouraging clients to test the waters by communicating the value of managed advisory services – where they are supported by specialists in the bank for a fixed fee – before being advised to make full use of discretionary services.

Beyond tweaking pricing models, innovation is in evidence. Some private banks, for instance, have introduced trailer-free share classes, which were previously only available to institutional investors.

Looking ahead, we can expect regulators in this part of the world to continue  tightening their reins on intermediaries through disclosure requirements rather than going for a straight ban on fees.

Even if the regulators did decide to ban fees, it is unlikely that market and  investment sentiment would suffer as a result. However, the investor community – the retail sector especially – would need significant education of its benefits.

As stakeholders step up their demands for transparency, enduring winners are likely to be those organisations that have a strong disclosure framework in place that goes beyond retrocessions reporting to include other key risk areas such as anti-money-laundering and combating the financing of terrorism.

 

This article appeared in the September issue of the Citywire Asia magazine.

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