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Industry players call for more fee choice

An increasing number of financial planners in Hong Kong are calling for the industry to move away from its commission-based payment structure to reduce potential conflicts of interest.

In some parts of the world, particularly in the United States, it has become popular for financial planners to be paid either only on the advice they give their clients, or as a percentage of the size of the portfolio they manage. Hong Kong investors should be given the choice of how they would like to compensate the people looking after their assets, they believed.

Angeline Chin, chief executive of the Institute of Financial Planners of Hong Kong, said Asian customers seemed particularly unwilling to pay for financial advice, and were more trusting of the companies that sold them financial products. Even though a bank or an insurance company was going to promote its own products, they were more likely to listen to that kind of free advice, even when it was not objective, she said.

But she cautioned that such advisers were being paid by someone - meaning the consumer was paying in the end. Those charges were typically in commissions or an ongoing rebate of part of a management fee to the financial adviser that sold the product to a customer in the first place.

'As you know, there is no free lunch. So the advisers are getting paid someplace else,' Ms Chin said.

The problem with this kind of free advice is that financial advisers have an incentive to sell as many products as possible to a customer - to get more commission - no incentive to tell a customer to sell a product - which would result in lost commissions. It's buy, buy, buy.

Ms Chin said she hoped that people across Asia would start to view financial planners as professionals. She is promoting property financial planning not only in Hong Kong but also Singapore, Malaysia and Thailand.

'If you go and see a lawyer or a doctor, you expect to pay a fee. That is the upgrade we expect to see in financial planning.'

Puru Saxena, chief executive and founder of his money management company Puru Saxena, said it was more tricky than that.

'It is very normal practice in Hong Kong that brokers advise their clients to buy into hedge funds through custodian accounts, where they pay not only upfront commission to brokerages and so-called financial planners, but also have a trailing fee,' Mr Saxena said. 'None of them disclose that to their clients, but they all receive hidden kickbacks and trail commissions.'

If a hedge fund charges a client an annual management fee of 2 per cent of assets per year, it may give 0.5 per cent or 0.25 per cent back to the adviser that found the client.

'So clients are actually misled,' Mr Saxena said. 'Even if the hedge funds are not doing anything, the financial adviser will never let you get out of this because they make money from it.'

Puru Saxena Wealth Management said it did not receive any payments for selling products to clients, and received its money only from a percentage of client assets that it oversees and a performance fee - a share of any profits it generates. There are critics even of that structure, who say fee-based planning is a better, more ethical approach.

Asset-based systems encourage money managers to shoot for the moon in search of higher performances to earn their performance fee. It may also encourage unnecessary risk and an emphasis on products such as stocks that produce easily tracked results.

Mr Saxena's company only manages investments portfolios and does not sell insurance or offer financial planning. Although many financial advisers claim to be independent, he estimated 90 per cent of advisers in Hong Kong took commissions, often hidden, which he said was 'highly unethical'.

Robbie Bennetts, chief executive of Professional Investment Services, an Australian-based financial planner that in April bought Horwath Financial Services in Hong Kong, said his company tried to give its customers as many options as possible.

'It's consumer choice, whether it be an hourly rate, or a percentage of the funds upfront ongoing, or fully disclosed commission,' he said. 'We can offer it to the client any way you want to do it.'

But he said fee-based financial planning hadn't taken off. More than 90 per cent of his company's clients still asked that the insurance companies and fund managers whose products they were buying paid Mr Bennetts' company via commissions.

But when it comes to planning, he said customers weren't used to being charged a fee for financial advice. He believed the financial advice industry in Hong Kong needed to change.

For the time being, 'clients don't like their services being charged like an accountant', he said. 'They would much prefer to say 'Have the institution pay you, not me'.'

Besides Australia and Hong Kong, Professional Investment Services now also operates in Singapore, Malaysia, New Zealand, China and Canada.

Mr Bennetts said he didn't regret his name choice for his company, which yielded the acronym, PIS. 'Now everyone has heard of us.'

Glossary

Financial adviser broad term that has been appropriated by brokers, financial planners, money managers and insurance agents

Money manager an adviser who gives portfolio management advice, typically only on investments, without necessarily offering other products such as insurance or performing broader financial planning.

Asset-based financial adviser gets paid a percentage of the client's assets under management and typically does not accept other payment such as commissions

Fee-only financial adviser receives payment only from clients, in hourly or fixed fees instead of a percentage of the assets. They accept no commissions or compensation from other products such as insurance

Certified financial planner has passed the certification exam of the Certified Financial Planner Board of Standards and adheres to its ethical and practical requirements

Wealth management used to apply mainly to managing the money of the rich, but now used for everything from insurance to stocks

Financial planning finding an overall plan to meet your financial needs

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