Investment Advisers in Asia: The Missing Fiduciary Duty - Chicago Global

January 30, 20200
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Ben Charoenwong & Alan Kwan

As Asian economies grow and wealth accumulates, more households turn towards experts for investment advice. There is no denying that the financial services sector in Asia has exploded. A recent industry report by Ernst and Young estimates that the wealth of high net-worth individuals alone in Asia is over USD$9 trillion as of 2016. But despite this astronomical growth in the asset management industry, the regulatory framework in Asia is still developing.

The main responsibility of an investment adviser is to provide clients advice on financial planning and asset allocation but may also help to implement such recommendations. To protect investors who might be less sophisticated, the United States and many other countries uphold advisers to fiduciary duty standards. In our research, we show that not only the fiduciary standard is important, but the quality of local regulators in the United States makes a large difference in misconduct. This highlights the importance of the fiduciary standard, but also the importance of having an international standard so that both advisers and clients can operate in comparable settings. Yet, the fiduciary duty is not a standard requirement between financial advisers and clients for most countries in Asia.

The consequence of this regulatory gap reveals itself intermittently on the front pages of financial news. Just recently in December of 2017, a large online investment scheme in China was found out to be a fraud. Founded in 2012, Qianbao.com promised returns of up to 60 percent a year and raised over USD$4.7 billion. When found out to be a Ponzi scheme, protests broke out in the Jiangsu province of Nanjing. But prior to the founder turning himself in, the official state news Xinhua news simply warned the company, “Don’t organize and don’t participate in illegal activities”. Worse yet, this scandal came on the heels of a $7.7 billion financial scam in online lender Ezubo in 2015.

The absence of a coherent regulatory and enforcement framework means that authorities do not have a systematic approach to dealing or monitoring misconduct in the investment advisory industry. As this industry grows, the role of regulators become more important in ensuring a fair environment for investors. To this end, regulators in Asia is considering whether to impose and enforce a fiduciary duty on investment advisers.

Whether financial advisers have a fiduciary duty determines the legal liability of their actions.  A fiduciary duty is an ethical and legal relationship of trust between two people. If a person violates their fiduciary duty, they are personally liable to account for the ill-gotten profits. They may face both civil or criminal legal consequences.

Compared to the regulatory environment in the United States, established by the Investment Adviser Act in 1940, the regulatory framework in Asia for financial advisers is both young and lax. For example, according to the Investment Adviser Act of 1940 in the United States, all investment advisers are fiduciaries. Investment advisers shown to commit fraud or knowingly sell unnecessarily expensive financial products may face fines, lose their advising license, or even face jail time.

Out of the 9 countries for which we could find data, only three dictates a fiduciary relationship between advisers and clients. This is in stark contrast to the fiduciary relationship required of all board of directors and shareholders for all 9 countries.

Asian countries also differ in the stringency of the investment adviser regulatory landscape. In Singapore, financial advisers are required to show their compensation scheme in writing, be it fee-based or commissions-based or both. On the other hand, in Hong Kong, financial advisers do not even need to disclose their commission rebates, remuneration, or soft dollar benefits which they receive from product providers.

 

Country Investment Adviser Industry Size
(billions USD)
Fiduciary Duty Regulator Governing Law Year Enacted[1]
China 28,000 No China Securities Regulatory Commission Securities Investment Fund Law of the People’s Republic of China 2012
Hong Kong 23,000 No Securities and Futures Commission Securities and Futures Ordinance 2002
Singapore 2,000 No Monetary Authority of Singapore Financial Advisers Act 2001
South Korea 434 Yes Financial Services Commission Financial Investment Services and Capital Markets Act 2007
Taiwan 163 Yes Financial Supervisory Commission Republic of China (Taiwan) Financial Consumer Protection Act 2011
Malaysia 151 No Securities Commission Malaysia Securities Commission Act 1993
Thailand 121 No Thailand Securities and Exchange Commission Securities and Exchange Act 1992
Philippines 54 Yes Bangko Sentral ng Pilipinas Monetary Board Resolution No. 26 2011
Indonesia 20 No Financial Services Authority Capital Markets Law No. 8 of 1995. 2011

 

Although the absence of an explicit fiduciary duty relationship between investment advisors and clients do not mean that clients are not protected, the requirements are less stringent. For example, in Singapore, the Financial Advisers Act does not impose a fiduciary duty on financial advisers. It only requires that investment advice be made on a “reasonable basis”. This means that legally, financial advisers only have the duty to represent their firm’s interests, not necessarily that of clients. Investors seeking investment advice from these advisers should be wary of how the advisers are compensated and their incentives for giving a certain type of advice.

Identifying a licensed financial adviser may also be difficult. In some countries, they are not required to disclose their registration status. The burden lies with investors to find out. For example, Singapore reserves the term “financial adviser” only for individuals who are registered and regulated under the Financial Advisers Act. However, the use of the terms “financial planner”, “financial analyst”, or “financial consultants” are not reserved and can be used by anyone.

Given the inherent conflict of interests in the financial adviser industry, since there seems to be a regulatory gap in Asia, the burden falls upon investors to understand the investment management industry. Unsurprisingly, most investors prefer to use simpler assets as store of wealth, such as bank deposits, certificates of deposit, or even real estate.

[1] This refers to the original enactment, ignoring revisions. Typically, revisions are implemented to make the regulation more stringent. The fiduciary duty requirement column reflects the current regulatory framework .


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