Key Points

• Three major trends have shaped the local unit trust industry in the last decade.
• Compliance costs are increasing, due to the changing regulatory landscape – this translates to increasing costs for servicing each individual client.
• Industry-wide, there has been a shift towards having a lower upfront sales charge along with an ongoing recurring fee which also allows for free switching.
• The number of investment products has increased significantly which increases costs but also gives many more exciting options to investors.
• A move towards multi-tiered pricing of products instead of single pricing will see investors benefiting in a big way especially in the area of fixed income funds.

The unit trust industry in Singapore has evolved rapidly over the years. Certain key trends in the last 10 years have become very dominant and these are likely to shape the industry going forward and have important implications for distributors like Fundsupermart.com as well as investors.  

The Three Major Trends

The first trend, which involves significant changes in the regulatory landscape for the wealth management industry, is closely linked to the recent global financial crisis. In the aftermath of this crisis, we can expect to see more safeguards and regulations being introduced and implemented in the future, not only in the West, but also here in Singapore, which functions as one of the key financial hubs in the region.

For example, a consultation paper released by the Monetary Authority of Singapore (MAS) has been circulated to industry players. In the consultation paper, there is a requirement that investors have to take a Customer Knowledge Assessment test, administered by an independent third party. Only when investors pass this test, will they be allowed to purchase the investments of their choosing. While the purpose of this proposal is to protect the interests of the end investor, the implementation of this would likely result in a big change to the transaction process, and increase transactional costs as a whole.

The second trend is that the industry is going through a shift from having just an upfront sales charge, to having a fee structure with lower upfront sales charges, and also an ongoing recurring fee. This has been a trend in the more developed markets and in Singapore in the last 5 years, but the pace of change is accelerating following the financial crisis. The trend is happening partly due to market forces, and partly due to regulatory changes.

In 2003, when the financial advisory industry was still in its infancy stages, the concept of wrap fee was still very new at that time, and most financial advisors still charged an upfront sales charge of 5%. Today, a large majority of them have now shifted towards the use of a wrap fee platform, which allows for lower upfront sales charges, free switching, but with an ongoing recurring wrap fee. In the online area, free switching has been introduced in certain entities such such Fundsupermart.com. In an average month, Fundsupermart.com processes as much as 11,500 switches, compared to just 5,500 buy and sell transactions.

Banks have also started to introduce similar fee structures that allow for free switching. in the past, the upfront sales charge, which was at 5%, could subsidise any ongoing operational and transactional charges. However, with the upfront sales charges coming down, financial institutions are now moving towards a pricing structure similar to the wrap fee pricing structure mentioned earlier.

The third trend is that the number of funds, and hence investment options available to investors, has increased tremendously. When Fundsupermart.com first started 10 years ago, we launched with less than 200 funds. Today, the number of funds on Fundsupermart.com is close to 400. This number can only grow as fund houses continue to introduce new funds. In addition, investment options such as Exchange-Traded Funds (ETFs) and index funds will increasingly become available to local investors.

The Implications For Distributors

These trends have major implications for unit trust distributors like Fundsupermart.com. Increasing regulatory procedures, along with the large number of new funds, growing popularity towards free switching and new investment products like ETFs, which distributors will have to embrace and accommodate, will mean that distributors like us face increasing ongoing operating costs.

In the past, when banks were levying a sales charge of 5% for equity funds, we could offer a sales charge of 2.5%, with no free switching. We relied on the profit margins from the front-end sales charge to subsidise the ongoing operational costs arising from updating fund prices and data, handling of fund dividends, custodian duties, keeping track of holdings and sending out statements etc. Now, we face shrinking front-end margins and increasing ongoing costs, so this kind of subsidy is simply no longer viable.

The introduction of a new ongoing charge will allow us to accommodate these ongoing transactional and operational expenses. We will then be able to introduce different tiers of low and attractive sales charges for different product classes.

For instance, we believe that fixed income funds are underrepresented in the average investor’s portfolio – fixed income funds are an excellent alternative to the plain vanilla savings account or fixed deposits. We have reduced drastically the sales charge of the fixed income funds to 0%-0.75%, one of the lowest sales charges around for fixed income funds.

What Can Investors Expect?

Investors will continue to enjoy even lower upfront sales charges going forward. Another benefit to investors is that the number of funds, and hence investment options, can only increase. In the months to come, Fundsupermart.com will bring on board new
investment products like index funds and ETFs. At the same time, free switching is here to stay and this key feature will become increasingly valuable to investors as the number of funds continue to increase.

The multi-tiered pricing system will allow investors to benefit from the differential pricing for different product categories, in particular fixed income funds, where investors will benefit almost immediately from their steady returns, due to their extremely low sales charge. This will be a departure from the past when the higher upfront sales charge of fixed income funds made it such that investors had to wait for a longer period of time before the returns of fixed income funds allowed them to even break even.

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Changes In The Local Unit Trust Industry: Implications for Investors