The rebate and soft commissions debate
I HAVE been following this topic with interest and would like to add to your articles.
I am a financial adviser who recommends unit trust and mutual fund investments to my clients.
I believe it is about time the SFC [Securities and Futures Commission] put a stop to the commission rebates fund managers receive from stockbrokers when transacting on behalf of the funds that they manage.
It is a complete conflict of interests.
As long as the fund manager makes money out of the commission deducted from the fund with each trade, one must question whose interests the fund manager is thinking of - the investor's or his own.
It has been said that a fund of one of the larger and more prominent fund managers turned over in excess of 600 per cent last year. Were these trades all in the investor's interest? In other developed countries, kickbacks are disallowed and fund managers are able to negotiate commissions.
I believe it would be beneficial for Hong Kong and would enhance Hong Kong's competitive position in Asia to follow a similar course.
Most importantly, it would remove the conflict of interests.
The fund manager's only concern in deciding to make a trade would be whether it is in the investor's interest.
Further, as fund managers would not make any money out of the commissions they pay to stockbrokers, they would be more likely to negotiate lower commissions, thus fulfilling their fiduciary duty to keep the funds' expenses to a minimum.
If fund managers need to increase charges to compensate for the loss of commission rebates, assuming they negotiate lower commissions, the total costs to the investor should be no greater.
Fund managers' remuneration would, however, become more transparent, which should make it easier for investors to make an educated decision as to who they wish to invest with.
Finally, because most fund managers are not likely to increase their management fees by as much as the fund will save in commissions, and because their funds are not likely to be traded as heavily, investors are likely to benefit from economies of scale and receive better value.
Until stockbrokers' commissions become negotiable, I believe commission rebates should be allowed.
However, the rebates must be credited to the funds' balance sheets and not to those of the fund managers.
- STEVE CUMMING Director Asia Pacific Financial Planning Ltd