Morningstar Magazine - October/November 2017 - 9

In 2013, India introduced a "reasonable basis"
standard for mutual fund distributors that choose
to be licensed as an investment advisor. In making
this election, investment advisors also agree
to charge clients directly for advice and not receive
commissions. However, the number of licensed
investment advisors in India remains small.
Most advisors in the world continue to be paid
through commissions, and banks and insurance
companies remain one of the primary channels of
distribution. This is particularly evident in Europe
and Asia. Although advisors in those markets
have been slow to transition to fee-for-service, we
believe that change will inevitably come as
regulations and trends take hold. This is true not
only for advisors but also for the organizations that
hold the licenses for advisors, product
manufacturers, and administration platforms.
It will be interesting to watch how the move
toward fees progresses in India and markets that
are considering similar licensed structures,
such as Korea. While creating a class of
independent advisors is an important step, the
markets that have seen the most success have had
other catalysts at work. Australia, for example,
passed the Future of Financial Advice legislation
in 2012, but it also had independent models
and systems established well before then. With
all the noise in the U.S. about the fiduciary
standard, the trend away from commission-based
products to fee-for-service accounts has been
occurring there for well over a decade.
Improved Disclosure of Commissions

While many advisors are still working in
commission structures around the world, markets
are making it easier for investors to determine
exactly how much they are paying for advice.
Europe's revised Markets in Financial Instruments
Directive, known as MiFID II and set to take
effect in January, places disclosure requirements
on advisors who receive commissions. India
now requires distributors to disclose commissions
they earn to investors. Regulators also issued
guidelines for Indian asset managers to streamline
and cap upfront and trailer commissions.
Often, one of the precursors to the banning
of commissions and trailer fees is the requirement

to disclose these costs on statements. This was
the case in Australia. MiFID II accelerates
disclosure over the next three years in Europe.
Singapore is also weighing the disclosure
of trailer fees in product highlight sheets.

fund's expenses and fees-from which
management gets paid. What is more valuable
is knowing whether a portfolio manager
is investing alongside me in his or her fund. I am
pleased that this information is disclosed both in
India and the United States.

Trading Costs

Regulatory Guide 97 from the Australian Securities
and Investments Commission, which is coming
into effect, requires high levels of fee disclosure
for both superannuation funds and managed
investment schemes. Transaction and operational
costs will become much more transparent under
these new standards. The costs of trading,
for example, will now need to be disclosed, as they
are in other markets. We expect to see similar
moves in other markets.
Under MiFID II, asset managers across Europe
will be required to pay directly for the research
they receive rather than combining those
payments with the commissions for trading and
execution. Before, brokerage costs were
processed as transaction costs and were treated
as a cost of doing business, coming directly
out of the total return of a fund. The reality is that
these costs for investors can be substantial.
Salaries and Incentives

Probably one of the most interesting pieces
of regulation we've seen over the past two years
is the requirement for Indian portfolio managers,
chief investment officers, and other senior
managers to disclose their salaries to investors.
In the U.S., fund companies must disclose
the structure of portfolio manager compensation;
for example, whether compensation
is based on performance or assets under
management. This information gives investors an
idea of how manager incentives are structured.
In both cases, investors see something more
akin to the disclosure for a publicly listed company.
Arguably, these compensation disclosures
are about governance and making sure that key
individuals are not taking more than their
share or that they have suitable performance
hurdles. I am a big believer in knowing how
incentives are structured; they tell me a lot about
culture and behavior. But I am not sure I
need to know someone's salary if I know the

Simplified Prospectuses

Another interesting disclosure issue is the use
of simplified prospectuses and information
documents. To make prospectuses more digestible
to investors, regulators are shortening their
lengths. In our survey of 25 markets, simplified
prospectuses in 13 markets were down to an
average of two pages.
Thailand has made big strides in point-of-sale
documentation over the past two years.
New mandated visualization charts and tables,
along with new data points such as portfolio
turnover ratio, maximum drawdown, and
credit ratings of securities, have helped Thai
investors understand complex investing data.
Although improvements have been made,
the lengths of simplified prospectuses in several
markets still stand between five to 10 pages.
Readability and helping investors understand the
nature of their investments must remain a priority.
Getting a Measure on Value

Whether it's compensation structures,
commissions, or trading costs, the theme around
the world is consistent: Shine a light on costs.
And make no mistake. When regulators base
their new rules on the unbundling and
transparency of costs and commissions, the old
saying "what gets measured gets done" is loud
in their ears. With measurement comes the
pressure to deliver value for what is being charged.
If as an industry we can deliver that value and
become part of the solution that helps
investors and societies achieve their goals, we
will be in a good place for years to come. K
Anthony Serhan, CFA, is managing director, research
strategy, Asia-Pacific, with Morningstar. He is a member
of the editorial board of Morningstar magazine.

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Table of Contents for the Digital Edition of Morningstar Magazine - October/November 2017
