Regulatory boundaries and attractive
commissions from insurance products discourage Hong Kong’s
independent financial advisors from selling retail mutual funds,
according to a report from research firm Cerulli.

Mutual fund sales account for a
tenth or less of most Hong Kong IFAs’ total business; insurance (including
investment-linked assurance schemes, or ILAS) and credit cards
are far more lucrative product lines, as they yield much higher fees, according
to the report, titled Tea Cup in a Storm.

Efforts by asset management firms to distribute more through the IFA
channel in Hong Kong have gone largely unrewarded. "Mutual fund distribution is, at best, a
negligible part of IFAs’ overall portfolios, and the IFA channel accounted for
only 3.9 per cent of Hong Kong’s total mutual fund assets as of June 2011," said Boston-based Cerulli.

This is partly due to regulatory
hurdles such as high capital requirements making it impossible for many IFAs to
distribute funds, and partly due to commissions far
lagging revenues from insurance products.

The other impediment is the
scattered nature of IFA companies in Hong Kong. There are an estimated 90 IFA
firms in the city with 4,500 individuals in total. By
contrast, there were 164 authorized insurers in Hong Kong with 36,150 agents,
as of 30 September 2011.

The IFA channel is also relatively small and inefficient. The average IFA company employs only
four people and only a few have more than 50 staff.

"Attempts to bypass the disparity in
commissions by focusing on advice have failed. Hong Kong is a very
commission-driven market, a characteristic that doesn’t show any sign of
waning. Investors are happy to listen to advice, but not willing to pay for it," added Cerulli.

As a result, said Cerulli, IFAs are finding it harder to survive in their current model as they become more marginalised. In fact, in Cerulli’s survey of
asset managers in Hong Kong, IFAs ranked among the lowest priority as
a channel fund houses want to widen. By clamping down on the IFA channel, the likelihood is that these firms will increasingly be forced to move into the insurance channel.