Notebook - Page 2 of 2 - Chicago Global



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, 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 .



Ben Charoenwong & Alan Kwan

Many people rely on financial advisers when making important financial decisions. The United States 2013 Survey of Consumer Finances finds 58% of American households are a client of some investment adviser, who collectively manage over $66 trillion in assets as of 2015.This is over four times the total assets of all commercial banks. As of December 31, 2015, the total assets of all commercial banks according to the Federal Reserve Board of Governors was $15.5 trillion.

The fiduciary duty is an ethical and legal relationship of trust between two parties. It consists of the duty of care, duty of loyalty, duty of good faith, duty of confidentiality, duty of prudence, and duty of disclosure. As the highest standard of legal care, if a person violates their fiduciary duty, they are personally liable for all ill-gotten profits or any losses. However, a fiduciary duty does not imply that the person must place their clients’ interests before their own. The fiduciary duty is subject to interpretation and may vary in execution and enforcement quality.  More surprising is the apparent failure of the market to remove bad actors: 50% of advisers lose their jobs after misconduct and 44% of terminated advisers find work within the industry in one year.

The high re-employment rates for misbehaving advisers motivates examining the importance of regulators in curbing misconduct. In our forthcoming paper in the American Economic Review, with Tarik Umar, an assistant professor at Rice University, we study whether regulator jurisdiction affects misconduct in the financial adviser industry.

In our paper, we exploit a rare opportunity to study a change in regulatory jurisdiction. The Dodd-Frank Wall Street Reform and Consumer Protection Act mandated that the SEC transfer oversight of “mid-sized” advisers – those with between $25 to $100 million in assets under management – from the Securities and Exchange Commission (SEC) to state regulators. This change was announced on July 21, 2011, and in effect by January 1, 2012. We explore whether advisers who switched from the SEC to state regulator received more complaints, and whether this increase in complaints reflects weakened regulatory oversight.

Regulators may be important in monitoring advisers directly, educating investors, implementing regulation, and identifying and investigating a specific act of misconduct. Oversight of investment advisers is currently divided between a national regulator (the SEC) and state regulators, with the SEC overseeing larger and more complex advisers. A national regulator may have superior human capital, organizational practices, and visibility. In contrast, a state regulator may have better soft information and be more accessible to local constituents.



In 2001, a small group of academics and practitioners met to discuss the equity risk premium (ERP). Ten years later, in 2011, a similar discussion took place, with participants writing up their thoughts for this volume. The result is a rich set of papers that practitioners may find useful in developing their own approach to the subject.

The past 10 years have shown that the ERP, far from being a settled matter, continues to challenge analysts. The research and observations in this volume have a number of implications for investment practice and theory. First, investors and analysts should take care to be explicit about their estimates of the ERP. We still too often use different definitions of, assumptions about, and approaches to the ERP, or leave it altogether implicit in our analyses of asset markets and valuations. Further clarity may help reduce the number of occasions when we are talking past each other. Second, we should be clear about what model we are using when we offer a forecast or explanation of the ERP.



Many investor portfolios are propelled by assets tied to economic growth. Over the past two decades, increasing emphasis has been placed on reaching for ever higher returns, with the result that portfolios have become even further skewed toward growth assets. Diversification, a powerful force in portfolio construction, has been hobbled by high common risk factor exposures across creatively named investments that continue to deliver highly correlated returns, mainly driven by equity risk.

These brittle portfolios are especially at risk from a change in global growth regimes because the impact would be felt across a majority of assets rather than being isolated in one corner. For these reasons, preparing portfolios for a realignment in economic growth is a primary portfolio construction decision. One remedy is a renewed emphasis on assets that are less sensitive to growth: bonds, real assets, and some alternatives.

by Eugene Podkaminer, Wylie Tollette, and Laurence Siegel