Hong Kong brokers urged to diversify as they lose out to fund houses

Brokerage firms need to diversify or seek merger opportunities to avoid being squeezed out by the growing number of fund houses, industry players told the South China Morning Post.

Brokers, traditionally the largest group of intermediaries in the city, have been struggling in recent years due to falling market turnover, lower commission rates and competition from banks offering similar services.

The popularity of exchange-traded funds has also hurt brokers because such products, which track the constituents of an index, are more passive investments that do not require brokers to suggest stock tips.

The latest blow to brokers was losing their lead to fund houses in May in terms of the number of firms in the city, according to Securities and Futures Commission data released last week.

"This is the result of government policy which in recent years has been introducing measures to promote the fund industry," said Christopher Cheung Wah-fung, the legislator representing the financial services functional constituency. "The government has not helped the brokers to develop their businesses."

In an effort to encourage more fund houses to set up shop in the city, the government proposed a law change in March that would make it easer to launch fund products. The government and regulators also worked with mainland authorities on a plan to introduce a mutual recognition scheme that would allow cross-border fund sales.