HONG KONG • Both Hong Kong and Singapore are set to launch new disclosure rules for wealth managers regarding what they are paid by funds to sell their products - moves that are aimed at revealing conflicts of interest, but that could disrupt a business generating billions in fees.
Regulators are framing rules that will make such disclosures mandatory, said people with direct knowledge of the matter. Managers in the two Asian wealth hubs generally do not disclose overall revenues made from recommending funds to clients.
The moves could upend the existing model for fee-sharing between the funds and wealth managers, as clients might increase scrutiny of the products they buy in order to discern any conflicts of interest.
Fees from such deals could drop, and clients could bypass wealth managers altogether and source products directly from fund managers. Smaller wealth managers are the most vulnerable as their revenue comes mainly from selling third-party products to clients, say analysts.
"The increased transparency will give investors much clearer visibility of how much money investment advisers make from fund managers for distributing their products, and investors might think more carefully before buying a fund," said Ms Karen Man, a partner at law firm Baker McKenzie.
"It is likely to raise competition, mainly for smaller players, who might depend on product distribution as a principal source of revenue," said Ms Man, who focuses on financial service regulation.
Assets of the 20 largest private banks in Asia rose by 6 per cent last year to a record US$1.6 trillion (S$2.2 trillion), according to data from industry tracker Asian Private Banker. The bulk of the assets in the region are invested in equity markets directly or via funds, making it lucrative for wealth managers to earn fees on the sale of the products.
CLEARER VISIBILITY FOR INVESTORS
The increased transparency will give investors much clearer visibility of how much money investment advisers make from fund managers for distributing their products, and investors might think more carefully before buying a fund.
MS KAREN MAN, partner at law firm Baker McKenzie.
Their cut ranges from 0.5 per cent to as much as 6.0 per cent of the management fees charged by investment firms on the assets that clients put into funds. Wealth managers also get a so-called trailer fee - money paid to them annually as long as clients hold investment products in their portfolios.
The moves by Hong Kong and Singapore to increase disclosure follow similar initiatives by regulators in some Western nations after investors faced hefty losses on structured products linked to the collapse of Lehman Brothers.
Defaults of some illiquid, high-yielding bonds in Singapore last year also cast the spotlight on the role of wealth managers in "pushing" the products, according to the sources.
Hong Kong's Securities and Futures Commission (SFC) received industry feedback on fee disclosures earlier this year in response to a consultation paper. The paper argued disclosures would make it easier for clients to spot potential instances of conflicts, and would lead to lower fees in the long run.
"Based on a preliminary review, the responses received are generally supportive of our proposal to enhance disclosure with comments on the suggested manner of disclosure," SFC said in an e-mailed response to Reuters, adding that it would issue conclusions on the consultation after a detailed review.
The Monetary Authority of Singapore said that "work is under way to require trailer fees to be disclosed in the Product Highlight Sheet."
For smaller wealth managers in Asia, the requirements could come at a particularly tough time as they are already reeling from higher costs and cut-throat competition.
Many smaller Western wealth managers have closed shop, even though the Asia-Pacific is the world's fastest-growing wealth region, where nearly five million individuals have US$1 million each in liquid assets.