Digital platforms transform China’s fund distribution landscape

Digital channels are transforming China’s fund distribution

Digital wealth platforms powered by big data analytics and artificial intelligence are rocking China’s fund distribution and wealth management market. These platforms have been recording very vibrant business growth among retail investors, especially millennials and Gen Zs who are adept at using mobile devices to manage almost everything in their daily lives.

Lockdown and social distancing restrictions due to the coronavirus pandemic in China gave a strong boost to e-commerce activities, and many fund houses took the cue from the e-commerce marketing programmes of other consumer sectors. They livestreamed sessions for their star managers to communicate with investors, provide investor education and promote funds, and to allow investors to purchase products by just clicking on links during the virtual presentations.

The largest digital fund sales platform, Tiantian Funds (or “Everyday Funds”), a subsidiary of Shenzhen-listed online financial media company Eastmoney Information, recorded gross sales of 1.297 trillion RMB (US$202 billion) in 2020. That was equivalent to 2.7 billion RMB per day! Over half the sales were generated from non-money market funds. The number of visitors to the platform averaged 2.36 million per day.

Industrial and Commercial Bank of China, the top bank distributor, recorded just slightly over half of Tiantian’s sales figures. Until two years ago, ICBC was the largest fund distributor in China.

Other digital fund sales platforms, such as Howbuy, Zhonglu and Ant Financial, have all reported big increases in sales and operating profits. 

The total size of public mutual funds in China reached almost 20 trillion RMB in 2020 and the total amount of fundraising by new funds hit a fresh record of 3.2 trillion RMB, according to Chinese financial data firm Wind Information. 

There are currently over 600 million mutual fund investors in China, and the number is growing. 

Taking on the banks

Domestic banks, especially the big five and China Merchants Bank, have dominated fund distribution in China since the launch of the first open-ended fund in the country in September 2001. With their extensive branch networks and high level of familiarity with local investors, their total market share far exceeded that of securities houses and other channels combined.

Distributing funds has been a very lucrative business for banks. They would charge a front-end fee of 1.2%-1.5% to investors for subscribing to funds through their channels. 

It’s also not uncommon to see fund houses passing on 50% of their first-year management fee revenue to banks as a one-time incentive in order to secure more initial fundraising, and allow a fund to stay on their favoured lists for a longer time. Fund houses normally also have to choose the distributor bank as the custodian; the fee for this service is typically 12-15 basis points of the fund’s net asset value.

The fund distribution landscape started shifting in 2012. That’s when the China Securities Regulatory Commission (CSRC) broadened the sales channels by issuing new licences to third-party fund sales companies, in addition to banks, securities companies, future companies and other traditional players. Successful applicants that year included Tiantian, Howbuy, Zhonglu, Noah and Ant Financial. All these companies are now household names. 

In June 2013, Alibaba’s Ant Financial introduced an online money market fund, Yu’e Bao (or “Leftover Treasure”), allowing users of Alipay to invest as little as 1 RMB left over in their digital wallets. It became an instant hit, especially among the young, and ordinary people whose small savings were largely ignored by banks. 

At its peak in March 2018, Yu’e Bao’s assets under management topped 1.69 trillion RMB and it was the largest money market fund in the world. Tianhong Asset Management, which managed the funds from Yu’e Bao, also became the largest fund manager in China by assets. 

The runaway success of Yu’e Bao was a huge boost to the digital fund sales industry. As a result, the number of fund sales licences granted has been increasing year after year. According to data from the Asset Management Association of China, there were 436 fund sales licence holders as of end-December 2020, including 116 independent companies. 

Source: Asset Management Association of China (AMAC)

Although the majority of licences were granted to traditional players, other independent platforms have also entered the scene, including e-commerce platforms such as WeChat, Tencent, Baidu and JD.com. The participation of these e-commerce giants with their millions of users and powered by artificial intelligence and big data analytics capabilities has shaken up the bank-driven fund sales model. 

Digital platforms have rapidly developed into fund-selling powerhouses. Leading players such as Tiantian, Howbuy and Ant Financial all carry more than 6,000 funds, representing over 70% of public mutual funds available in the market, double the number carried by banks. Investors pay much lower subscription fees than at banks. The fee for money market funds can be zero, while fees for bond, equity or mixed asset funds can be as much as 60% lower than buying through banks. 

Tiantian and Howbuy are positioned as fund supermarkets. As one-stop platforms, they provide a lot of market news, fund data, research, fund recommendations, and 24-hour client service. However, there is high competition for prominent ‘self-space’, and fund houses have to pay for sponsorships and advertisements to increase visibility. 

Ant Financial adopts the same e-commerce model as its parent company, Alibaba, allowing fund houses to operate their individual ‘counters’ on the platform to promote their brand and sell their fund products directly to users. The platform provides fund houses with access to artificial intelligence capabilities such as user profiling, operational optimisation and smart marketing, and share in their revenues in return. 

Banks fought back by upgrading their online banking platforms to provide more comprehensive fund data, reducing subscription fees and making subscriptions and redemptions easier. Several big banks have also rolled out robo-advisory solutions using proprietary algorithms to construct fund portfolios to meet the financial targets and risk tolerance level of clients. Examples include ICBC’s AI-Advisor and China Merchants Bank’s Machine Gene Investment. 

However, although robo advisers operated by banks or digital wealth platforms, such as Lufax or CreditEase, would typically provide portfolio recommendations, the investment decisions had to be made by users. That’s because China’s regulations required two separate licences for investment advisory and asset management. 

In October 2019, CSRC launched a pilot mutual funds advisory scheme to ease this restriction by allowing fund distributors to provide customised investment advice and maintain discretionary control over clients’ investment portfolios. They would be able to execute trades and rebalance portfolios automatically without seeking client consent each time, thus providing a more seamless experience similar to robo advisers outside China. Providers can charge a fee up to 5% of the client’s net asset value for providing the service. The scheme is still running as a pilot project. 

Apart from fund houses, banks and securities companies, the 18 advisory licences granted thus far include three technology-driven wealth platforms – Ant Finance, Teng An under Tencent, and a young company called Yingmi. There are currently more than 80 other applications awaiting review and approval.

Shift in model

This marks the beginning of a shift towards a fee-based advisory model. It may help rein in the tendency of fund churning under the sales-oriented model and stop distributors from receiving incentives based on gross sales volume from fund houses in addition to front-end subscription fees from investors. The cap on advisory fees may also encourage some licence holders to turn to robo advisory and other artificial intelligence technology as a more cost-efficient and scalable solution to serving retail investors.

In April 2020, Ant Financial teamed up with Vanguard and rolled out Bang Ni Tou (or “Help You Invest”), a robo-advisory service accessible through Alipay. It uses artificial intelligence to recommend mutual fund portfolios to customers with as little as 800 RMB to invest. In July 2020, the Financial Times reported that the service had drawn 2.2 billion RMB from about 200,000 customers in the first three months of operation.

This March, Vanguard announced that it was halting its plan to obtain its own mutual fund licence in China and was focusing on opportunities within the Ant Financial joint venture. Just days after the announcement, Bang Ni Tou issued a press release saying that more than one million users had signed up for the service within less than a year of the launch.

The correction in China’s A-share market this year has seen massive redemptions through all channels, including digital platforms. But their growing importance for distributing funds is likely to continue, chipping away market share from traditional channels.

The proliferation of digital wealth platforms, together with the push for investment advisory services, have transformed China’s fund distribution landscape by bringing some much-needed diversification and discipline to the industry. 

Digital distribution is not the silver bullet for fund houses. Brand recognition and performance track records remain critical in order to stand out in the crowded digital platform space. But it does provide them with a wider range of options to develop a comprehensive multi-channel distribution strategy.

The push for investment advisory, however, will be a cultural change. It will be a big challenge for the industry to convince Chinese investors to refrain from self-directed investing and trading habits and place their wealth with human or robo advisers for longer-term and more strategic investing.

This article was published in Asia Asset Management’s June 2021 magazine titled “Changing Landscape”.