Planned rules to shake up Asia wealth managers' fee-sharing business

By Saikat Chatterjee and Sumeet Chatterjee

HONG KONG (Reuters) - Hong Kong and Singapore are set to launch new disclosure rules for wealth managers on what they are paid by funds to sell their products, moves aimed at revealing conflicts of interest but which could disrupt a business that generates billions of dollars in fees.

Regulators in the two main Asian wealth hubs are framing rules that will make such disclosures mandatory, people with direct knowledge of the matter said. Wealth managers in the two centres generally don't disclose the overall revenues they make from recommending funds to clients.

The moves could upend the existing fee-sharing model between the funds industry and wealth managers as clients may increase scrutiny of the products they buy to discern any conflicts of interest.

It may lead to a drop in fees from such deals and could even make clients bypass wealth managers altogether and source products directly from fund managers, with smaller wealth managers most vulnerable because their revenue mainly comes from selling third-party products to clients, analysts say.

"The increased transparency will allow investors to have much clearer visibility of how much money investment advisers make from fund managers for distributing their products, and investors may think more carefully before buying a fund," said Karen Man, partner at law firm Baker McKenzie.

"It will likely increase competition for all the players, and mainly the smaller ones, who may depend on product distribution as a principal source of revenue," said Man, who focuses on financial service regulation.

Assets of the 20 largest private banks in Asia rose by 6 percent last year to a record $1.6 trillion, according to data from industry tracker Asian Private Banker. The bulk of the assets in the region are invested in the equity markets directly or via funds, making it lucrative for the wealth managers to earn fees on sale of those products.

The wealth managers get a cut of 0.5 percent to as much as 6.0 percent of the management fees charged by investment firms on the assets clients put into funds. They also get the so-called trailer fee, which is money paid to them annually as long as clients hold the investment products in their portfolios.

CONSULTATION PAPER

The moves by Hong Kong and Singapore to increase disclosure follow similar initiatives by regulators of 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, the sources said.

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 that fee disclosures would make it easier for clients to spot potential instances of conflicts, and 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 emailed response to Reuters, adding it will 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 the smaller wealth managers in Asia, the disclosure requirements could come at a particularly tough time as they are already reeling from higher costs and cutthroat competition.

As a result, many smaller Western wealth managers have shut shop, despite Asia-Pacific being the fastest growing wealth region in the world with nearly 5 million individuals having $1 million in liquid assets.

Andrew Hendry, director at Hong-Kong based Westoun Advisors, said the potential fee disclosure rules could make clients approach fund houses directly and cut out wealth managers.

"We are starting to see a lot of negotiations in the fee sharing space," he said.

Clients of wealth managers, however, back the proposed changes.

"Since the Lehman mini-bond debacle, wealth managers have become more careful of stuffing unwanted products down clients' throats for fees and this new push to transparency is welcome," said a client of a European private bank in Hong Kong.

(Reporting by Sumeet Chatterjee and Saikat Chatterjee; Additional reporting by Anshuman Daga in SINGAPORE; Editing by Muralikumar Anantharaman)