The old age debate of fees versus commission has rumbled on for many years around the world.
In the UK, the introduction of the Retail Distribution Review (RDR) paved the way for the advice market to head towards fees. There was a somewhat mixed reaction to the move towards fees – but ultimately it has been accepted and thrived in the UK.
Across the Channel, the EU recently faced a backlash against banning commissions and had to u-turn when announcing its retail investment package. As part of the package, the EU is banning inducements for “execution-only” sales, where no advice is provided, to ensure that financial advice is “aligned with retail investors’ best interests”. It was originally looking to ban asset managers and insurers from paying financial advisers for recommending their investment products.
This also led to a European Federation of Financial Advisers and Financial Intermediaries (Fecif) member writing an editorial called the future of financial advice in Europe: why a commission ban is not the answer.
Another region which is still more commission-focused is Asia Pacific. The advice markets of Hong Kong and Singapore have some firms which have embraced fees, but the majority still use a commission model.
International Adviser has spoken with a range of firms in the industry to discuss whether the Hong Kong and Singapore advice markets can move fully towards a fee-only model.
The biggest argument against fees in the UK was that banning commissions would mean the end of some advice firms – and they wouldn’t survive the move towards fees.
So, is this an issue for firms in Hong Kong and Singapore?
An unnamed source from a global wealth manager said: “Diversification of income streams away from commission-only models just makes good sense from a governance perspective. As an ‘upside’ it also creates less volatility in the business revenue model.
“In other words – the business is less dependent on new client acquisition and can focus on the value proposition for existing clients because the business is getting paid to service their existing clientele and in doing so is generating income not wholly based on finding new relationships.”
Simon Parfitt, director of wealth management at Pyrmont Wealth, added: “A big issue is the markets are fragmented. There are more than 100,000 registered insurance agents all selling commission-based insurance products, primarily in the domestic market.
“It is also common for domestic IFA firms to favour a commission rather than fee model, both at a product and fund level.”
Sometimes the debate also leads to the suggestion that fee-based models cannot work in every advice market due to the landscape.
Wing Chan, head of manager research for Europe and Asia Pacific at Morningstar, said: “While a product-led, commission model has historically dominated fund distribution in Hong Kong and Singapore, technology has enabled the emergence of digital platforms, robo-advisers and we are seeing an increasing number of alternative distribution models.
“Fund distributors and wealth managers in Hong Kong and Singapore are also placing a greater focus on building holistic portfolios that aim to align to investors’ financial goals, and we see that a key step towards the provision of more comprehensive wealth advice for consumers.”
Ian Black, managing director for Apac at Globaleye, added: “By focusing on needs and goals first and selecting the relevant solutions to deliver these we ensure better client outcomes. It is essential to deliver advice in a transparent and comprehensive manner to ensure that consumers are fully informed before making choices on how to proceed. This is very much in keeping with the UK model.
“On the other hand, many clients are unwilling or unable to work on a fully fee for service model and prefer to pay for advice through the solutions, either by commissions or by deduction from the plan – whichever is better aligned with their needs.”
Fees may not be the standard at the moment – but is there a chance they could become the norm in Hong Kong and Singapore?
Black added: “The true issue is one of transparency rather than the payment mechanism. If a consumer is aware of the costs, both product and advice, and agrees to these it is of little consequence whether these are paid via the product or directly as a fee. One key point to be considered is the flexibility to change the solution easily as consumers’ needs evolve over their lifetime.
“There is a need however for more financial institutions to move from a reliance on initial commissions to a mix of an initial fee followed by fees for ongoing service. This will build a more resilient advice sector and better align the interests of firms and consumers.”
The unnamed source from a global wealth manager also said: “I think that giving clients the choice of paying for services via fees will attract the better-informed clients. In today’s 24/7 access to information world, many clients can do their own research online and will come prepared to talk about fees in a way that that they wouldn’t have done 10-15 years ago.
“I think as client awareness continues to increase; the industry will have to adapt, especially where high net worth clients are involved.”
Expat vs domestic
The Hong Kong and Singapore markets are quite complex – and also have a big domestic market as well as expat.
As UK expats are used to fees, the commission debate may only be a discussion in the expat market.
But according to the unnamed source from a global wealth manager, the domestic market is also regularly discussing the fees versus commission debate.
They added: “I think the idea of expat versus local models is evolving. Clients are increasingly international with a much broader footprint of investment requirements and access to information. The question of a commission or fee-based model is an industry issue and one that I don’t think ranks very highly on client agendas.”
Pyrmont Wealth’s Parfitt said: “At the moment I think yes, there doesn’t seem to be a desire or momentum in the domestic market to change.
“I think that is also due to client expectations – if you come from a country with a more mature financial planning market, such as the UK or Australia, then perhaps you just expect the same when you are overseas.”
The introduction of fees in places like the UK was sparked by regulation and watchdogs.
The argument most of the time is regulators should not always step in to solve every issue – many would argue that this is the same in Hong Kong and Singapore.
Morningstar’s Chan said: “Regulations have been a key driver in the wealth management industry’s move towards fee-based advice in markets such as the UK, Netherlands and Australia.
“Based on our understanding and interactions with regulators in Asia, there is the tendency to take a softer approach – rather than banning commissions outright, the focus is on transparency making sure that investors are clear about the fees they are paying.
“Rather than a bundled fee structure, our view is that investors are best served by a clear delineation of fees between advice and investment management so they can make choices that are most suited to their needs.”
Parfitt added: “I think it will only change with regulatory intervention and in the domestic market especially insurance companies have a lot of sway and would likely lobby against this. Fragmentation in the market does not help with getting a cohesive framework.”
Lastly, the unnamed source said: “Regulators exist to protect clients and the industry that they oversee, they already have an understanding of how things operate in their markets. The question is: can they, should they do more? I think it is safe to say that the markets in Singapore and Hong Kong are operating efficiently, but we mustn’t rest on our laurels.
“The regulator should be regularly engaging with the firms that it oversees to understand how they work with clients, including remuneration models. It should be a collaborative gradual expansion of revenue streams that increase market diversity and continue to improve client outcomes. I don’t think it is up to the regulator to solve something. It is less of a problem to solve and more of an adaptation of their regulatory approach to account for a wider and more diverse client servicing dynamic.”