Most developed markets have long offered numerous and diverse channels for asset management products—except in South Korea. Until very recently, there have really been just two primary channels in South Korea—banks and brokerage companies, which suffer from conflicts of interest, as they are motivated to sell products run by their affiliates. As of late last month, investors got a new option: Korea’s first online fund supermarket.
The newly launched online fund platform, known as Fund Online, seeks to confront the proprietary sales approach of the big bank and brokerage firms by providing an alternative that is more neutral and widely available. Additionally, Fund Online, which serves smaller, independent asset managers, aims to reduce costs for investors, and create a more competitive distribution landscape.
The concept of investing as a long-term means of wealth generation is slowly developing within Korean households. When I first started working in the industry in Seoul in 2005, investors were beginning to build unrealistic expectations because of the performance of the Korea Composite Stock Price Index. Retail investors typically held high expectations for substantial double-digit returns, so fees of a few percentage points were less of a concern. At the time, fund firms charged fees as high as 2.5%. Particularly popular at the time was a so-called “installment-type equity fund,” which investors could buy into with a fixed contribution deducted from their monthly paychecks. It was a notable phenomenon, as the average Korean found equity funds to be novel new instruments for savings.
After the Global Financial Crisis of 2008, retail investors became more cautious and, not surprisingly, fee-sensitive. Consequently, the average total expense ratio of actively managed equity funds in Korea dropped to 1.41% in 2012. Of that, commissions to distribution channels lost the biggest share.
Fund Online, which is privately held, hopes to allow retail investors more investment choices and also provide better transparency over fees. The fund supermarket says it has halved sales channel commission to approximately 0.35%. In a related development, the Korean government has introduced the concept of Individual Financial Advisor (IFA) to help provide unbiased investment advice to retail investors. Currently, the average Korean investor is accustomed to getting advice for “free” from their local bank branch, where they hold bank accounts; but, as previously implied, few things come for free. A symbiotic relationship between the fund supermarket and the IFAs, if it develops, should lead to greater transparency for the industry, and may promote the virtues of long-term investing—a welcome development for Korea’s capital markets.
Soo Chang Lee, CFA, Research Analyst at Matthews Asia
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