Local practitioners believe the era of fee-based advice is coming to Hong Kong, a survey has found.

Hong Kong will inevitably move to a fee-based system of financial advice, a survey of practitioners finds, suggesting this business model will come to pass as regulators push to weed out conflicts of interest around the world.

The survey of 132 advisors by Vanguard, the global investment house, finds that three-quarters of respondents see a move towards fee-based advice in future. Strikingly, only 5 per cent of them said their advice is entirely financed by fees at the present time.

The Asian city-state’s Securities and Futures Commission has proposed raising standards governing fees and advice, although it has not called for a total ban on commissions.

A number of jurisdictions, such as the UK and, most recently, the US, are pushing advisors away from commission-driven sales models towards fee-based advice, convinced that this fee-driven approach encourages more objective counsel for clients and involves less pressure to push products and services that are unsuitable. Rival Asian financial hub Singapore, which introduced its FAIR Act legislation more than two years ago, has moved to raise the professionalism of financial advice, but it has not yet banned commissions. In the US, a new Department of Labor Fiduciary Standard is due to take effect in April, seen as decisively tilting the balance against commissions.

“The Securities and Futures Commission [of Hong Kong] has proposed improved standards around advice and fees, including prohibiting fees and commissions for ‘independent’ intermediaries. While the proposal falls short of a complete ban on advisor commissions, as has been instituted in other places, investors will benefit from it as they would be better equipped to make investment decisions,” said Linda Luk, managing director, retail and intermediary business, Asia, Vanguard Investments Hong Kong.

While advisors in Hong Kong cited being better able to help clients, rather than simply selling products, as the top reason why a fee-based model is superior, their key reason for adhering to a commission-based model was revenue driven.

By way of comparison, in Canada, where the fee-versus-commission make-up is most similar to Hong Kong's, the advisors who preferred a commission model were similarly concerned about what would happen to their profitability if they were to shift to a fee-based system, the Vanguard report said.

Challenges
In Hong Kong, more than twice as many advisors said their job has become more difficult over time than those who rated it as becoming easier. Advisors around the world reported that their experience tended towards "much more difficult", though advisors in Hong Kong were on the lower end of the difficulty scale compared with those in Australia, Canada and the UK.

Hong Kong advisors cited regulatory changes, market volatility and the impact of the global economy as the top three challenges. Though regulation was cited as a challenge, its positive effects were recognised as promoting clients’ trust in the industry as a whole and in advisors in particular.

Among the regions surveyed, Hong Kong advisors were the most optimistic about growing their client base, with just over three-quarters saying they expect it to increase. Hong Kong also had the highest percentage of advisors who said they would focus on attracting new clients in 2017.