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.

Survival

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.”

Success

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.”

Status quo

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.”

Regulatory action

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.”

During a European Federation of Financial Advisers and Financial Intermediaries (Fecif) editorial for July 2023, Frank Rottenbacher wrote a piece called The future of financial advice in Europe: why a commission ban is not the answer. AWF is a member of Fecif.

This comes after the European Commission published its retail investment package in a bid to “empower” retail investors.

The proposals aim to allow retail investors to make investment decisions that are aligned with their needs and preferences, ensuring that they are “treated fairly and duly protected”, as the EU looks to trust and confidence into the financial industry.

As part of the package, the EU will be banning inducements for “execution-only” sales, where no advice is provided, to ensure that financial advice is “aligned with retail investors’ best interests”. It u-turned on its bid to ban asset managers and insurers from paying financial advisers for recommending their investment products.

AWF’s Rottenbacher said: “Europe has formulated ambitious goals in many areas to protect the interests of consumers as well. The latest goal is to make the capital market more accessible to citizens. To this end, the Retail Investment Strategy was launched, which aims to encourage and enable consumers to invest more in the capital market. These goals are undoubtedly important, correct and deserve recognition.

“However, we also need to be honest about the challenges that come with implementing such goals. Often, the best intentions are torpedoed by proposals that ultimately make it impossible to achieve the goals. An example of this is the proposed commission ban in the retail investment strategy, which would ultimately exclude large parts of the population from qualified financial advice.

“It is important to emphasise that commission-based remuneration does not automatically lead to conflicts of interest. Financial advisors provide high-quality advice and suitable solutions to their clients regardless of how they are remunerated. However, a ban on commissions would lead to a one-sided solution and limit the diversity of advisory models.”

Balanced approach

He believes that the advice industry should “take a balanced approach that focuses on both consumer protection and access to qualified financial advice”.

“It is important that consumers can make informed choices and have a wide range of advice services available,” Rottenbacher added. “This requires flexible and differentiated solutions that meet consumers’ needs and preferences. As long as consumers are not willing to pay adequate hourly rates for qualified fee-based advice, a commission ban will lead to them doing even less for their old-age provision or investing less or not at all in the capital market. This cannot be in the interest of politics and certainly not in the interests of consumers.

“Dialogue between policymakers, regulators and the financial services industry is crucial to find the best ways to achieve the goals set. Together we can work on practical regulation that strengthens consumer protection, enables innovation and at the same time ensures that all citizens have access to qualified financial advice.

“Let’s not lose sight of the positive goals, but also address the potential dangers of overly restrictive and patronising implementation. If the political will is there, if prejudices are broken down, we can find solutions together that strengthen consumer protection, preserve the diversity of advisory services and encourage European citizens to participate in the capital market.

“At Fecif, we are very much ready for such a constructive dialogue.”

The media report said that the EU is going to bow to intense lobbying after it received backlash from industry figures such as Efpa chairman Emanuele Maria Carluccio.

An analysis by the European Commission last year concluded that an EU-wide full ban on incentive payments made by investment product manufacturers to financial advisers would be the most effective way to remove conflicts of interest and improve results for end-investors.

But according to the FT, the EU has now retreated from this position and will limit the ban on inducement payments to “execution-only” sales of investment products where no financial advice is delivered.

The European Commission said in a document seen by the FT: “A full ban on inducements would entail significant and sudden impacts on existing distribution systems, with consequences that are hard to predict.”

The media report said that the finalised version of the EU’s retail investment strategy will be published on May 24 but alterations to the plans appear unlikely at this late stage.

International Adviser has contacted the EU and EC for comment but there was no reply in time for publication.

Industry reaction

The financial advice world did not think highly of the ban prior to the u-turn.

In February 2023, the CFA Institute issued a survey that found 34% of investment professionals based in the EU think that inducement payments should be banned. It also found most respondents think a ban is unlikely to prevent mis-selling of investment products and cited concerns that the ban could negatively impact on the variety of products offered to clients.

IA spoke with a number of firms involved in the European advice industry to discuss the potential u-turn on commissions.

David Vacani, principal at Beacon Global Wealth Management, said: “I think that this shows the power and strength of the banks and insurers in the EU and let us hope that no advice gap does develop. As we have said for a long time, let us hope that we at least see a progression to greater transparency and clarity for clients.

“Clients are increasingly sophisticated with complex cross border issues and needs and it is only right that they receive sound long-term financial planning solutions at a proper price and with transparency on what they are paying by way of fees or commission.”

Alex Ingrim, senior investment analyst at Chase Buchanan, said: “The existing distribution network for investment products and advice in Europe only serves to strengthen the position of the largest banks and financial institutions. The backtracking by the EU on inducement payments will continue to benefit banks at the expense of consumers looking for independent advice.

“Many consumers throughout the EU are unaware of how their advisers, be it independent advisers or advisers at banks, are paid, and they do not understand the misaligned incentives that exist. Furthermore, many investors are not receiving whole of market advice, and are only being advised on in-house products that pay advisers and brokers inducements. This ruling by the EU will put Europe even further behind the US and UK in promoting fair outcomes for investors.”

John Westwood, chairman at Blacktower, added: “We believe in and fully support transparency on showing fees, whether that be a fixed sum or a percentage. We also fully support a highly regulated approach. The one question remaining is whether any proposed changes to the present distribution system in Europe has been tested appropriately to ensure they are in the best interests of investors, and not simply a reaction to pressure from consumer groups or industry lobbying.”

Andy Oliver, chief executive of Private Client Consultancy, said: “I think this is a sensible move by the Commission to review the changes to the distribution model in the EU. A wholesale change would have disrupted a tried and tested process. While there is an absolute need for transparency, this could be enforced by the regulators to show 100% disclosure regarding the total expense ratio of the investment product chosen and any other wrapper used would at least allow the consumer to make an informed decision to either accept the proposition based on fees or not.”

Education

Within the CFA Institute survey, there was another idea mooted which could help change the advice world.

As opposed to an outright ban, investment professionals in the EU favoured increasing efforts on financial literacy and investor education (59%) and mandating clear disclosure of all commission payments received by distributors before investments are made (55%) as more effective methods of preventing mis-selling.

The European Federation of Financial Advisers and Intermediaries (Fecif) has not been in favour of a widespread ban on commissions. It believes that the decision made by the Commission is “correct and very significant”.

Vania Franceschelli, Fecif chairperson, said: “European consumers need advice that guarantees transparency and clarity. But they also need access to that advice. The present structure of the industry enables accessibility for all citizens. A general ban on commissions would destabilise the current distribution channels of savings products, hamper the provision of investment advice where it is most needed, and potentially bring the EU capital market to a halt, by limiting consumers’ choice.”

However, the Federation believes that it will be very important to also work to improve financial education, through a European-level plan too, if possible.

Franceschelli added: “We believe the decision to eliminate commissions on execution-only transactions is correct. Thankfully, the number of these operations has decreased since the introduction of Mifid, but further consumer protection in this regard is sensible.

“The changes that will be introduced by the European Commission could be a starting point for making the market even more efficient, including the improvement of business models of intermediaries, which may evolve in the coming years.”

This comes as the EU is looking to ban commissions for the sale of financial products to attract more retail investors into capital markets.

The CFA Institute survey also found most respondents think a ban is unlikely to prevent mis-selling of investment products and cited concerns that the ban could negatively impact on the variety of products offered to clients.

As opposed to an outright ban, investment professionals in the EU instead favoured increasing efforts on financial literacy and investor education (59%) and mandating clear disclosure of all commission payments received by distributors before investments are made (55%) as more effective methods of preventing mis-selling.

The EU plans have come under fire as International Adviser reported that the chairman of the European Financial Planning Association (Efpa) sent a letter to the European Commission (EC) to oppose the ban of commissions for financial advisers.

‘Diverging views’

Josina Kamerling, head of regulatory outreach for CFA Institute in Emea, said: “Policymakers in the EU are actively discussing whether to restrict the practice of inducements on the sale of specific investment products. This important debate is often caught between the risks inherent in the current system for biased, costly, and unsuitable investment advice on the one hand, and on the other, the concerns about a growing advice gap as a potential consequence of an inducements ban.

“However, diverging views amongst EU member states is likely to prevent a unified approach on the issue, and is reflective of the diversity of market structures which needs to be tackled before any ban. In our view, banning inducements is not the immediate solution, but addressing a number of key market structure issues is crucial.

“There are measures that we believe regulators can take to tackle the underlying incentivisation issues behind product mis-selling without resorting to an inducements ban, which carries risks of its own.

“Our survey finds that the most important regulatory reforms needed to combat mis-selling are to mandate clearer and full disclosures of commissions and fees paid, and to introduce clear standards for product information including cost structures. Such a move would help bring the standards at play in the practice of inducements into line with what is already in place for investment performance information.”

Global opinion

The CFA research also looked at the international views on the banning of financial product commissions.

Globally, just 33% of respondents believe commission payments to financial advisers in respect of retail financial products should be banned and 45% agree that a total ban could negatively impact on the variety of products offered to clients.

Most respondents agree that the most important reform needed to combat mis-selling would be to mandate disclosure of all commission payments received by distributors before investments are made (66%).

Further, 65% of respondents globally felt that improving disclosures of product key features, including full disclosure of all product costs would be an important mandate.

Globally, 81% of respondents agree that a full disclosure requirement, with appropriate enforcement, on all commissions and fees paid could be helpful to combat the issues of mis-selling of financial products.

Increasing efforts on financial literacy and investor education also ranked highly in most markets as an important reform (46%).

EU financial services chief Mairead McGuinness is set to unveil her ‘retail investment strategy’ to attract more retail investors into capital markets.

But according to Reuters, the strategy will include a potential ban on commissions for financial advisers distributing banks’ and insurers’ products.

McGuinness believes this would lead to cheaper products for customers, citing the examples of the UK and the Netherlands, where commissions are banned. She explained that products where commission is paid are, on average, 35% more expensive than those without commission.

But Markus Faber, a senior member of the European Parliament, told the financial services chief that the move could cause a fundamental shift in the banking business models since most retail customers in the bloc access financial advice mostly via banks and insurance companies.

The “inducements” paid for the sale of financial products also fund the widespread non-independent advice model in several of the member states.

Distribution

Germany echoed this, with finance minister Christian Lindner stating the move would create a “serious setback” for the EU’s capital markets and it would actually limit choice for consumers.

He added that, in Germany, commission-based selling is the predominant system when accessing financial advice and that a ban would work against that model and inhibit access for consumers.

Lindner continued that the current EU regulation on inducements is already “well balanced and forces investment firms to act in the best interest of their clients”.

Several banking and insurance industry bodies sided with Lindner on the move.

David Vacani, principal at Beacon Global Wealth Management, told International Adviser: “The main issue is that there are major institutions in Germany, as in France for example, where big banks and insurance companies largely control the distribution of financial planning products.

“I would suggest there is significant vested interest in commission-paying products to the banks and insurers. That is very much the case in France.

“Clearly the EU’s direction of travel is ideally towards adviser fee and a clarity of charges for investments and financial planning rather than just a product sale, but some of these big institutions will fight to maintain their commission-paying products I expect.

“In the UK post-RDR there has been a significant improvement in the costings of investment products and this has given significant benefits for clients with clarity of fees and advice.”

Affordability

Chris Lean, director and financial planner at Aisa International, told IA: “While we operate on an adviser charging fee basis in the same way as the UK, most people in the EU rely on banks and insurance companies to provide advice on insurance and savings.

“I would agree with Christian Lindner as it would restrict access to advice for many that are not used to paying fees in the same way as they would for other professional services. For me, the issue is not the commission payments themselves, it is more about transparency and investors being able to understand and agree to the amount of incentive and whether it is reasonable given the sums invested, the advice given, and the work involved.

“In places like the UK, where commission was banned some time ago, there is an ever-increasing ‘advice gap’ developing between those that are willing and able to pay fees separately and the rest. While the ban has resulted in better priced products, this is only really benefitting those that can afford the advice.”