On October 25, China Securities Regulatory Commission (CSRC) released a notice about the Pilot Investment Advisors in Mutual Fund Industry (the Notice), attracting extensive attention and causing heated discussions in the wealth management industry.

 

 

For implications of the Notice, we summarized key points and the most frequently asked questions based on interpretations of several financial institutions with extensive compliance experience.

 

 

 

Summary of the Notice

 

 

Purpose of the Pilot Scheme: promote the “buy-side investment advisor” mode of the wealth management industry to better protect investors’ interests.

 

 

Mode of the Pilot Scheme: switch from transaction and redemption fees based business to AUM sized-based fees business to avoid conflict of interests between financial institutions and investors.

 

 

Target Object of the Pilot Scheme: large licensed mutual funds firms (asset management and funds sale); extremely strict requirements: 1. The AUM size of non-monetary market funds of funds sale firms should be greater than 100B RMB; 2. The number of clients of asset management firms should be at least 100M.

 

 

Currently only five top licensed mutual fund companies are in the first batch of the pilot firms.

 

 

Service Types of the Pilot Scheme: divide the client accounts into 2 types: 1. Basic advisory services; 2. Management advisory services.

 

 

Service Requirements of the Pilot Scheme: qualified mutual funds firm should have research teams, investment committees, portfolio strategies, and diversified investment instruments.

 

 

Top 5 Questions that Concern Financial Institutions the Most

 

 

Q1. The Notice mentioned that the first batch of Pilot mutual fund firms should have at least 100B AUM size and 100M client base. Does this imply that unqualified firms cannot sell funds anymore?

 

 

Answer: Although the Notice divided service types into basic advisory service and management advisory services, the actual requirements of distinction are not strictly defined. Based on the fact that the pilot scheme is targeting large asset management firms, we can see the priority of CSRC is to develop and promote management advisory services. Because under the current circumstance, the basic advisory services cannot cover the costs of most financial institutions.

 

Therefore, the requirements of minimum AUM size and client size is for management advisory services. These small and medium firms should not worry too much as they are focusing on basic advisory services. The basic advisory services will not be affected.

 

We think CSRC is currently testing the feasibility of the pilot scheme. Once the official scheme is implemented, the requirements will be less strict so that an increased number of small and medium firms will become qualified and achieve their business transformation.

 

 

Q2. What are the implications of the Notice for the development of banks and fund commission agents?

 

 

A: The Notice requires that the pilot firms have research teams and investment committees, portfolio strategies, as well as diversified investments. These three requirements also come with detailed documentation, internal control and diversification requirements. Thus, good portfolio strategies, diversification strategies and internal control will be essential for financial institutions to meet qualifications of becoming the pilot firms. These banks and mutual fund firms should try to improve their research and portfolio diversification abilities to take advantage of the pilot scheme. Institutions that focus on traditional funds sale services will be surpassed by leading firms and other fintech start-ups.

 

 

Q3. What are the implications of the Notice for the development of Robo-Advisor business? Is this good news or bad news?

 

 

A: This is a positive signal for Robo-Advisor business. Investors with different investment objectives hope to get customized and differentiated investment plans, and the purpose of investment advisory is to provide investors with optimal portfolios that meet their risk preferences as well as risk-taking abilities. Hence, the Notice can benefit and promote the Robo-Advisor business. These Robo-Advisory platforms and Robo-Advisory products launched by financial institutions, will play an important role in investment advisory of mutual funds industry.

 

 

The benefits are mainly reflected in three aspects:

 

 

1. Strict requirements: “For fund commission agents to apply for pilot, their non-money fund AUM shall not be below 10B RMB; asset management institutions that satisfy the requirement item 1 to 3 in preceding paragraphs and have client size of 100M are eligible to establish subsidiaries in fund investment advisory pilot.”

 

Thus, only the biggest fund companies, funds commission agents (Tiantian Fund, Ant Fund, etc.), large state-owned banks and national joint-stock banks satisfy these requirements. Those giants will have a first-mover advantage in fund advisory business.

 

Institutions not eligible for the first batch of pilot include most fund companies, city commercial banks, rural commercial banks, broker asset management companies, and funds sale companies. They should start fund advisory business as soon as possible to better survive and to fulfill the requirements in the future batches of pilot.

 

Robo-Advisory is a weapon that these institutions can use to catch up quickly, boost AUM, and even overtake the industry leaders. As discussed above, the traditional “basic advisory service” model remains to be legal after the Notice, thus portfolio construction barriers, customized service capabilities, and volume of business will be vital to the applications in future batches.

 

 

2. Diversified investment: “For management advisory service, the market value of a single fund held by a single client shall not exceed 20% of the net value of the client’s account assets. Money market funds and index funds are not subject to this limit.”

 

These clauses show that regulators encourage diversified investment, and Robo-Advisor can achieve high-level diversification through allocating in different fund companies’ funds, while most advisory service only allocate their own companies’ funds.

 

 

3. Investor protection: advisory service “shall fulfill appropriate obligations according to regulations, fully understand the client’s situation, thoroughly evaluate client’s risk identification ability, risk tolerance, and investment target, accurately define the risk characteristics of the fund’s portfolio strategy, and provide the client with a fund portfolio strategy that meets their risk identification ability and risk tolerance”.

 

Investors have personalized investment demands, with some demanding high-yield, high-risk portfolios, while others demanding low-yield, low-risk portfolios. Advisory service does not aim to achieve the highest return but to construct the optimal portfolio that suits an investor’s risk-return characteristics and reduce volatility through diversification.

 

Therefore, there are not right or wrong portfolios, just suitable or unsuitable ones. Faced with diverse needs, the efficiency, performance, and user experience of advisory service are critical. Robo-Advisor that relies on quantitative algorithms and provides customized service has huge growth potential.

 

 

Q4. Are Robo-Advisor suppliers required to have fund advisory qualifications?

 

 

A: First, it needs to be emphasized that the current pilot is specified to be for large licensed institutions and excludes “unlicensed new institution applications”. As a technology provider for Robo-Advisor solutions, AQUMOM provides technology R&D for financial institutions and is not a traditional licensed institution eligible for this pilot. In Singapore, OEMs do not need a license to support licensed institutions but can only give investment recommendation rather than work under full entrustment. Under such model, OEMs do not need a license to offer service normally.

 

From another perspective, Robo-Advisor provides traditional bank (small and medium banks in particular) with multidimensional service including portfolio construction, dispersive matrix construction, big data investment decision, and advisory experience improvement. It helps banks to better improve their own advisory service capacity, which is in line with the Notice’s focus on aligning institutions’ and clients’ interests.

 

 

Q5. What are the challenges after the release of Notice?

 

 

A: The first challenge is the aggravating magnate effect. With industry leaders taking up more business, small and medium institutions should accelerate their cooperation with algorithm and technology companies, as this is the shortest path to enhance their service capacity. If institutions do not employ a strategic defensive posture, the traditional retail business will be carved up and user retention will be even more difficult.

 

The second challenge is as the big institutions gradually launch highly customized services, clients will be educated to become more sophisticated investors and demand higher asset management capacity from institutions. It will be hard to satisfy the enormous demand with the traditional product sales model.

 

On comparison, Robo-Advisor driven by algorithms is able to monitor the market 24-7, discover trends hidden from common investors, and make a more rational decision when important events happen. This solves the undersupply problem of financial planners and increases institutions’ asset management capabilities. It needs to be made clear that Robo-Advisor is not a substitution but an assistant for financial planners, giving them more time and energy to educate the investors as well as develop and maintain client relationships. Online advisory plus offline service would solve most challenges faced by institutions.

 

 

About us

As a leading startup in the FinTech space, AQUMON aims to make sophisticated investment advice cost-effective, transparent and accessible to both institutional and retail markets, via the adoptions of scalable technology platforms and automated investment algorithms.

AQUMON’s parent company Magnum Research Limited is licensed with Type 1 & 4 under the Securities and Futures Commission of Hong Kong. In 2017, AQUMON became the first independent Robo Advisor to be accredited by the SFC.

AQUMON’s investors include Alibaba Entrepreneurs Fund, Bank of China International and HKUST.

 

 

 

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