The SFC has "Cost Concerns"

1/12/2016 7:55:01 AM // Written by Phil Stockton

The SFC has

On November 24, 2016 the SFC's Ms Christina Choi Executive Director, Investment Products Division presented a very important speech: "The development of Hong Kong as an asset management centre Speech at the HKSI's SFC Executive Director Series"

This follows on a recent SFC announced public consultation on Hong Kong's Asset Management industry.

Ms Choi has the following to say on investment related costs:

"Cost concerns The second important reason why people invest in funds is the supposed cost-saving when building a diversified portfolio. Diversification is probably one of the few cardinal rules that all economic and financial professionals can agree on. Obtaining a diversified portfolio at a low cost is an oft-mentioned benefit from investing through funds rather than directly in individual stocks.

In the past few years, investors have become increasingly conscious about the costs of fund investment. This is partly a result of the interaction with the rise of passive investments, which promote themselves as low-cost alternatives to active funds. But more generally, investors and savers are becoming savvier and are starting to come to grips with the scale of the fees that they are paying, and how that affects the returns that they are getting.

In Hong Kong, this awareness is being fueled by the ongoing debate over Mandatory Provident Fund reform. The asset management and pension industry used to champion the magic of compounding. Small amounts of money persistently squirreled away over one’s working life can be turned into a sum substantial enough to underwrite a comfortable retirement. This concept has now been called into question by some. For example, the Economist has recently done some calculations, and showed that a one-percentage-a-year fee charged by the asset manager would reduce the amount that the saver received at retirement by a quarter2 . 2 Fund management – slow motion revolution”, The Economist (11 June 2016) 

In Europe, some regulators are studying so-called closet trackers, which are funds that pose as active funds, charge a high fee, but in fact invest according to some major indices. Authorities are mulling over what they should do about these funds.

Some market participants protest that regulators should not intervene in how much they charge, as long as the charges are clearly disclosed. This argument misses the point. Accusations of high fees, low returns, and asset managers benefiting at the expense of individual investors are undermining the industry’s credibility and investors’ confidence in the industry. Unless the industry starts taking these concerns seriously and puts investors’ interests ahead of its own, investors will find alternatives – be they low-cost trackers or some fintech offerings, for example. In the longer term, investors’ scepticism or even cynicism would undermine the sustainability of the industry. It is important that we all deal with these issues head on, by putting investors’ interests first."

Ms Choi goes on to talk about what can be done to improve the local market. She points the finger at the banks who collectively 'own' 78% of the fund distribution market share. She goes on to say that the Commission is aware of the consequences of such concentration but sadly stops short of spelling it out:

Retail clients get stuffed by the banks at every turn. Period. It has to end and we are heartened to see that the regulator has our bank dominated fund distribution network firmly in its sights.

The sooner all commissions are banned on all retail investment products the better
. #FeeOnlyHK

You can read the full speech here and if you want to know more about fee-only investing in Hong Kong click here.

Then have a look at why most active managers fail to beat their benchmark.

The low-cost revolution is running hard. 

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