Planned rules to shake up Asia wealth managers' fee-sharing business

Saikat Chatterjee and Sumeet Chatterjee

* HK, Singapore wealth managers may have to disclose fund

fees

* Potential new rules to hit smaller wealth managers most

* Move follows initiatives by some Western nations'

regulators

HONG KONG, April 13 (Reuters) - Hong Kong and Singapore are

set to launch new disclosure rules for wealth managers on what

they are paid by funds to sell their products, moves aimed at

revealing conflicts of interest but which could disrupt a

business that generates billions of dollars in fees.

Regulators in the two main Asian wealth hubs are framing

rules that will make such disclosures mandatory, people with

direct knowledge of the matter said. Wealth managers in the two

centres generally don't disclose the overall revenues they make

from recommending funds to clients.

The moves could upend the existing fee-sharing model between

the funds industry and wealth managers as clients may increase

scrutiny of the products they buy to discern any conflicts of

interest.

It may lead to a drop in fees from such deals and could even

make clients bypass wealth managers altogether and source

products directly from fund managers, with smaller wealth

managers most vulnerable because their revenue mainly comes from

selling third-party products to clients, analysts say.

"The increased transparency will allow investors to have

much clearer visibility of how much money investment advisers

make from fund managers for distributing their products, and

investors may think more carefully before buying a fund," said

Karen Man, partner at law firm Baker McKenzie.

"It will likely increase competition for all the players,

and mainly the smaller ones, who may depend on product

distribution as a principal source of revenue," said Man, who

focuses on financial service regulation.

Assets of the 20 largest private banks in Asia rose by 6

percent last year to a record $1.6 trillion, according to data

from industry tracker Asian Private Banker. The bulk of the

assets in the region are invested in the equity markets directly

or via funds, making it lucrative for the wealth managers to

earn fees on sale of those products.

The wealth managers get a cut of 0.5 percent to as much as

6.0 percent of the management fees charged by investment firms

on the assets clients put into funds. They also get the

so-called trailer fee, which is money paid to them annually as

long as clients hold the investment products in their

portfolios.

CONSULTATION PAPER

The moves by Hong Kong and Singapore to increase disclosure

follow similar initiatives by regulators of some Western nations

after investors faced hefty losses on structured products linked

to the collapse of Lehman Brothers.

Defaults of some illiquid, high-yielding bonds in Singapore

last year also cast the spotlight on the role of wealth managers

in "pushing" the products, the sources said.

Hong Kong's Securities and Futures Commission (SFC) received

industry feedback on fee disclosures earlier this year in

response to a consultation paper. The paper argued that fee

disclosures would make it easier for clients to spot potential

instances of conflicts, and lead to lower fees in the long run.

"Based on a preliminary review, the responses received are

generally supportive of our proposal to enhance disclosure with

comments on the suggested manner of disclosure," SFC said in an

emailed response to Reuters, adding it will issue conclusions on

the consultation after a detailed review.

The Monetary Authority of Singapore said that "work is under

way to require trailer fees to be disclosed in the Product

Highlight Sheet."

For the smaller wealth managers in Asia, the disclosure

requirements could come at a particularly tough time as they are

already reeling from higher costs and cutthroat competition.

As a result, many smaller Western wealth managers have shut

shop, despite Asia-Pacific being the fastest growing wealth

region in the world with nearly 5 million individuals having $1

million in liquid assets.

Andrew Hendry, director at Hong-Kong based Westoun Advisors,

said the potential fee disclosure rules could make clients

approach fund houses directly and cut out wealth managers.

"We are starting to see a lot of negotiations in the fee

sharing space," he said.

Clients of wealth managers, however, back the proposed

changes.

"Since the Lehman mini-bond debacle, wealth managers have

become more careful of stuffing unwanted products down clients'

throats for fees and this new push to transparency is welcome,"

said a client of a European private bank in Hong Kong.

(Reporting by Sumeet Chatterjee and Saikat Chatterjee;

Additional reporting by Anshuman Daga in SINGAPORE; Editing by

Muralikumar Anantharaman)