Enhanced disclosure of investment advisers when selling investment products
There is no doubt that incentives do matter for investment advisers (Note), and there has been much debate on the potential conflicts of interest arising from the commissions received by investment advisers. In Hong Kong, most investment advisers do not directly charge the clients any fees for the advisory and product distribution services, but receive commissions from the product issuers for the products sold to clients. This arrangement may potentially bias their advice, such as recommending products that offer higher commissions and encouraging clients to trade more frequently in order to generate more commissions.
Disclosure of sales-related information for better transparency
Under the SFC's regulatory regime, intermediaries (including investment advisers) when selling various types of investment products (such as retail funds and bonds) have to disclose sales-related information for better transparency. The disclosure should be made in writing prior to or at the point of entering into a transaction.
Enhanced requirement on commission disclosures
Following the 2008 financial crisis, intermediaries (i.e. investment advisers / distributors) under SFC's regulatory regime have been required to make specific disclosures on the explicit remuneration arrangements, and generic disclosure for monetary benefits that are not quantifiable (e.g. trailer commissions for fund investment) prior to or at the point of entering into a transaction.
To enhance transparency, with effect from 17 August 2018, such investment advisers / distributors have to further disclose the maximum percentage of the monetary benefits that are not quantifiable per year. This enhanced disclosure requirement would make it easier for investors to identify the fees to be received by investment advisers / distributors and would also facilitate comparison of the fees received by different investment advisers / distributors, thus making it easier for investors to assess potential instances of conflicts.
Investors should note that these requirements are only applicable under SFC's regulatory regime. This means that not all investment advisers / distributors selling investment products in Hong Kong are subject to these requirements. Hence, when purchasing investment products from investment advisers / distributors to whom the requirements do not apply (e.g. when purchasing ILAS from insurance intermediaries). Investors should find out more by asking these intermediaries, for example, about the monetary benefits they may be receiving for selling such investment products.
|Declaration of benefits by an investment adviser / distributor||Format of disclosure|
|A. Explicit remuneration arrangements (i.e. the monetary benefits received from a product issuer), e.g. subscription fee rebate.||The percentage ceiling of the investment amount or the dollar equivalent (specific disclosure on a transaction basis).|
|B. Trading profit made from a back-to-back transaction. For example, an investment adviser / distributor, after receiving a purchase order from an investor, purchases an investment product from a third party and then sells the same investment product to the investor and no market risk is taken by the investment adviser/ distributor.||The percentage ceiling of the investment amount or the dollar equivalent (specific disclosure on a transaction basis).|
|C. Non-explicit remuneration arrangements, e.g. remuneration arrangements among related companies.||Generic disclosure that the investment advisers / distributors will benefit from the origination and distribution of the product.|
|D. Monetary benefits that are not quantifiable prior to or at the point of entering into a transaction, e.g. trailer commissions.||Disclose the existence and nature of such monetary benefits, and the maximum percentage of such monetary benefits receivable per year (specific disclosure on a transaction basis).|
|E. Non-monetary benefits, e.g. professional service support and product training from a product issuer.||Disclose the existence and nature of such non-monetary benefits.|
Key points to note regarding product fees and commissions of investment advisers / distributors
- Transaction fees (e.g. fund subscription fee rebate) and on-going commissions (e.g. trailer fees) may vary with different investment advisers / distributors and different types of products. Do shop around and compare the fees.
- Be careful if an investment adviser / distributor asks you to trade or change your funds frequently as the more transactions you conduct, the more fees you will pay. Your potential gain from the investment may not even cover your transaction fees.
- Be aware of how the fees can affect your return on investment.
- Be clear about the fee arrangements. If in doubt, ask your investment adviser / distributor.
- Pay attention to the commissions that your investment adviser / distributor will receive by selling the product to you and carefully assess the investment adviser's / distributor's recommendations.
- Be a responsible investor. Do not solely rely on the investment adviser / distributor. Do your own research on the recommended products.
Note: Investment adviser is a broad term. In Hong Kong, it generally refers to intermediaries (individuals or companies) selling or advising on different types of investment products.
13 August 2018