With the advent of a ban on commission payments for the sales of mutual funds due in Australia and the UK from 2012, and one already in existence in India, it is timely to consider the impact this might have in Asia on advisers who use mutual funds for their clients.
What has been occurring in the UK and Australia, of course, is a lot of “positioning” by the adviser community. Some of the largest IFAs and wealth managers already offer fee-for-service business models which don’t depend on sales commissions. This represents a confidence in their advice being considered sufficiently "professional” to be on a par with other fee-charging service providers, such as accountants and lawyers. To achieve this, they will have built reputations and achieved strong results for their clients.
The consequence of not “upping your game” in this way is to lose out.
Recently in the UK there has been an upsurge in M&A activity on wealth management businesses, where the better groups are trying to combine their resources to forge bigger, more efficient units. In Australia, the wealth management business has been largely dominated by big banks and insurance companies, but they have been preparing for no-loads and a ban on commission for a long time.
Initial anecdotal evidence from India was that many financial advisers went out of business immediately after they ceased to receive commissions. This was a direct consequence of the immediacy of the introduction of the ban. Maybe it was also because the advice business there is less mature than in, say, the UK or Australia. A recovery in this area is already well under way.
While the rest of Asia has not yet been affected by the commission ban, it can be expected that over time something similar may happen. Charging management fees for assets under advisement will likely be the best way forward for most players. It ensures the advisers’ interests are more closely aligned to those of their clients.
But does this lead to a change in the way investors are advised on which funds to buy?
Yes. In many instances, there will no longer be a dependence on commissions from sales. This can allow an opening up to a wider choice of products. This can also include exchange traded funds (ETFs) as well as a whole array of no-load funds which were previously off the shelf.
The objective will be to select funds which can provide returns that involve less risk and are closer to the clients’ benchmarks. Using ETFs to become the core of a portfolio will become much easier, allowing the satellite to be in higher risk, higher (potential) reward funds.
But in doing so, will investors get a better deal? Will they get better funds to invest in?
Probably, because in any event their investments will no longer need to get past the “initial charge hurdle”.
Inevitably, however, the greater the choice the more confusion is likely. As a result, services like Morningstar and Lipper will certainly seek to fill the gap on provision of best advice.
The key issue, though, is whether clients will like what they see. If the early experience is anything to go by, then the answer is going to be a strong “yes”. It is already evident that clients prefer to see costs (ie. the impact of sales charges/commissions) on a pay-as-you-go basis rather than be loaded upfront.
Early adopters of the fee model will be the most likely winners. They will build the right type of experience which will enable them to cope with whatever changes occur in Asia – as they surely will – when the UK and Australia go no-load.