In their responses to the proposal to cap MPF fees, MPF providers - and even some government officials - are misleading the public. One said that "rather than talking about adding a cap on fees, the authority should ask people about the performance of MPF funds", and noted that while some MPF funds charged low fees, their performances were "awful". Yet another said: "This will limit the choice of employees as some may not mind paying a higher fee for a higher return product." These defenders of high fees are implying that if you pay a higher fee, you will get a higher return on investment. But it is a well-known fact in the investment field that this simply is not true. Higher fees do not correlate at all with higher returns on investment. This has been proven in one statistical study after another, over decades of research. Any investment industry professional who does not know this must have been at the very bottom of his investments class - or else the class pointedly skipped the facts, as do many training programmes for sellers of costly investment products. True, a person who is not knowledgeable about investment might find this counter-intuitive. But it is appalling that many professionals do not know it either, or have somehow blotted it from their minds; as their handsome salaries depend on collecting high fees. In most other fields, it's often true that you get what you pay for - a higher priced product or service delivers higher quality or performance. Not so in investment. Studies have shown that fees are a deadweight loss. Of course, some fees must be paid for the basic services of purchasing securities and record-keeping. But it has been shown by low-cost providers, such as Vanguard in the US, that these fees can be very low. High MPF fees are a loss to the investor, and it is not a trivial loss. If an investor, for example, pays 1.5 per cent a year more than necessary to accumulate funds over, say, a typical period of 35 years, the investor would lose up to 50 percent of her funds to fees collected by MPF providers. The providers argue that capping fees "would hurt the city's image as a free market". Hong Kong's image is stellar because it is an intelligent regulator of the financial industry, not because it does not regulate. All markets need regulation; the challenge is to regulate in such a way that the public is not exploited by fraudulent or deliberately misleading practices. To rectify the scandalous MPF fee practices, the regulator must not only cap fees but mandate that at least one ultra-low-cost fund, such as an index fund, be offered in each asset category. Michael Edesess is a visiting fellow at the Hong Kong Advanced Institute for Cross-Disciplinary Studies at City University
