Korean regulators eye distribution fees
The FSS questions why banks charge front-end loads on an annual basis.
Executives and banks and fund management companies in Seoul say the Financial Supervisory Service (FSS), South KoreaÆs securities regulator, is now looking at ways to reduce total expense ratios (TER) for mutual funds.
KoreaÆs W275.6 trillion ($301.5 billion) onshore mutual funds industry has enjoyed rapid growth this year, both for domestic equity and international equity funds. Commercial banks have emerged as the primary sellers of funds, with now a little over 50% of the industry in terms of assets under management, and an estimated 65-70% of new fund sales this year, according to industry executives.
Banks generally charge both a front-end load and take a share of the manufacturerÆs management fee. For a typical won-denominated, locally domiciled international equity fund, banks will charge a 1% front-end load and take up to 70% of the 1.8-1.9% management fee. So a first-time investor buying a fund at a bank will pay 2.9% or so.
This is cheaper than in other markets, notes Kang Moon-chul, head of investment product business development at Korea Exchange Bank. In Hong Kong and Singapore, the TER is likely to be 4% or more, because banks will charge front-end loads of 3-5%.
But banks acknowledge the FSS is questioning why they should be allowed to charge a front-end load on an annual basis. The regulator would like to encourage lower up-front fees by, say, encouraging banks to sell more via the internet. It may also suggest the government offer a tax deduction on front-end loads, to spur the funds industryÆs growth.
The FSS lacks the power to legislate fees, but the government could use its weight with, say, a market leader like Kookmin Bank and strong-arm it behind the scenes to cut its trail of management fees. If a market leader caved in to such pressure, the rest of the industry would be forced to follow. Kookmin and FSS officials could not be reached for comment.
One fund house director says a handful of boutique securities firms are now selling funds through their websites at 30% of the up-front cost. ôBut the traditional sales channels are resisting this approach,ö he says.
Bank officials say, however, that they are already moving this way. ôMany customers are spending time on our internet platform because they donÆt have time to visit a branch,ö says Cho Hyun-il, vice president at CitibankÆs wealth management department. He says the challenge for banks trying to build an advisory-based wealth management service is to put enough information and choice online without making it too complex.
They also argue that the FSS should understand that banks have just invested a lot of money in new sales platforms for funds û they have been allowed to sell funds since 1998 but only recently have most banks become large-scale distributors. They acknowledge they may face FSS scrutiny over the general lack of post-sale customer service.
On the other hand, bank execs argue they can maintain or even raise fees if they offer research-based advice. Shifting from merely pushing products to satisfy their desire for fee-based income to becoming proper wealth managers or private bankers would allow them to justify fee levels to the regulators and their customers.
Overall bank execs are confident that mutual funds will continue to be a lucrative source of business. Lee Woo-kong, senior executive vice president and head of the private banking division at Hana Bank, says the bank doubled its fee income from selling funds in 2007, both for its consumer and private banking arms. ôThis business will continue to grow even faster,ö he says. ôGrowth will continue for three to five more years, because penetration rates remain so low.ö
Among banks, Kookmin Bank is the biggest seller of funds in 2007 to end August, having sold W25 trillion year to date, followed by Shinhan Bank (W20 trillion), Woori Bank (W12 trillion) and Hana Bank (W11 trillion). At roughly W6 trillion each, the banking unit of Nonghyup (the National Agricultural Cooperation Federation) and Citibank tie for fifth, according to data from the Asset Management Association of Korea.
For a detailed look at investment trends in South Korea, please see the November edition of AsianInvestor magazine.
KoreaÆs W275.6 trillion ($301.5 billion) onshore mutual funds industry has enjoyed rapid growth this year, both for domestic equity and international equity funds. Commercial banks have emerged as the primary sellers of funds, with now a little over 50% of the industry in terms of assets under management, and an estimated 65-70% of new fund sales this year, according to industry executives.
Banks generally charge both a front-end load and take a share of the manufacturerÆs management fee. For a typical won-denominated, locally domiciled international equity fund, banks will charge a 1% front-end load and take up to 70% of the 1.8-1.9% management fee. So a first-time investor buying a fund at a bank will pay 2.9% or so.
This is cheaper than in other markets, notes Kang Moon-chul, head of investment product business development at Korea Exchange Bank. In Hong Kong and Singapore, the TER is likely to be 4% or more, because banks will charge front-end loads of 3-5%.
But banks acknowledge the FSS is questioning why they should be allowed to charge a front-end load on an annual basis. The regulator would like to encourage lower up-front fees by, say, encouraging banks to sell more via the internet. It may also suggest the government offer a tax deduction on front-end loads, to spur the funds industryÆs growth.
The FSS lacks the power to legislate fees, but the government could use its weight with, say, a market leader like Kookmin Bank and strong-arm it behind the scenes to cut its trail of management fees. If a market leader caved in to such pressure, the rest of the industry would be forced to follow. Kookmin and FSS officials could not be reached for comment.
One fund house director says a handful of boutique securities firms are now selling funds through their websites at 30% of the up-front cost. ôBut the traditional sales channels are resisting this approach,ö he says.
Bank officials say, however, that they are already moving this way. ôMany customers are spending time on our internet platform because they donÆt have time to visit a branch,ö says Cho Hyun-il, vice president at CitibankÆs wealth management department. He says the challenge for banks trying to build an advisory-based wealth management service is to put enough information and choice online without making it too complex.
They also argue that the FSS should understand that banks have just invested a lot of money in new sales platforms for funds û they have been allowed to sell funds since 1998 but only recently have most banks become large-scale distributors. They acknowledge they may face FSS scrutiny over the general lack of post-sale customer service.
On the other hand, bank execs argue they can maintain or even raise fees if they offer research-based advice. Shifting from merely pushing products to satisfy their desire for fee-based income to becoming proper wealth managers or private bankers would allow them to justify fee levels to the regulators and their customers.
Overall bank execs are confident that mutual funds will continue to be a lucrative source of business. Lee Woo-kong, senior executive vice president and head of the private banking division at Hana Bank, says the bank doubled its fee income from selling funds in 2007, both for its consumer and private banking arms. ôThis business will continue to grow even faster,ö he says. ôGrowth will continue for three to five more years, because penetration rates remain so low.ö
Among banks, Kookmin Bank is the biggest seller of funds in 2007 to end August, having sold W25 trillion year to date, followed by Shinhan Bank (W20 trillion), Woori Bank (W12 trillion) and Hana Bank (W11 trillion). At roughly W6 trillion each, the banking unit of Nonghyup (the National Agricultural Cooperation Federation) and Citibank tie for fifth, according to data from the Asset Management Association of Korea.
For a detailed look at investment trends in South Korea, please see the November edition of AsianInvestor magazine.
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