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.