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  • Nelson Huang

Local Practices of Advisory Business in Taiwan - Custodian Bank in the Driving Seat

Updated: Sep 8, 2021





We discussed about the rising demand from local Securities Investment Trust Enterprises(“SITEs”) in last November insight. (refer to https://www.navigateconsultant.com/post/new-ideas-wanted-taiwan-advisory-business). The robust demand comes from SITEs’ enterprise transformation intention but lack of product design capabilities, particularly when the funds are in relation to international investments. They turn to seek for investment advisors who have long-term successful track record globally to make sure the performance in line with investors’ expectation and meanwhile study from the advisors’ trading experience.


A lot of complex communication is involved in the product idea pitch. Though some of the offshore mangers who show the ambition to come in the fund advisory business in Taiwan, can counsel lawyer or professional investment advisors to understand the regulations when they design localized products, most difficult part for the offshore managers is the understanding of local practice and kicking at the right door.


Types of Investment Advisory:

Generally speaking, there are three investment advisory types:


1) Fully authorization: The SITE appoints the investment advisor to fully manage the portfolio, including provision of model portfolio and trading execution directly with advisors’ force. Basically, this shall be the most efficient model, and most preferred by the advisor, since the advisor understands the best its portfolio model and can implement the trade execution in no time manner on the ground that the advisor is well familiar with the trading matters, can negotiate with the trading parties correctly and get the best quotation, particularly when it’s related to international bond investment or OTC products; further importantly, the problem of time zone difference can be conquered. However, to adopt fully authorization, the SITE shall have a very completed internal control guideline, including the selection criteria and procedure of investment advisor, benefit analysis and risk control etc., approved by the board of directors., as before they fully hand in the responsibilities of fund asset utilization to an external investment advisor. The regulation also sets relevant strict constraints of utilizing the fully authorization by the SITEs, in terms of the advisor’s qualification, advised investment regions, and exposure cap, etc.


2) Model portfolio provision & trading execution: Providing the model portfolio is approved by the SITE, the investment advisor is given the authorization to execute the trades accordingly when it got the instruction from the SITE. This is the compromise way when certain second or third-tier SITEs are eligible of fully authorization; meanwhile to avoid the strict regulatory constraints set to the portfolio and the investment advisor.


3) Model portfolio: The simplest way is that the model portfolio is provided by the investment advisor. The SITE takes all the duties of the trade activities afterwards. Whether the SITE’s trading capabilities can stand up for sophisticated trading flows, with foreign trading counter parties, will be the identical question.


Parties in the advisory business mode:

In the very special situation that Taiwan mutual fund market is highly customer-driven, the custodian bank and channel distributors most of time play as the gate keeper in the fund IPO game.


  • SITE: The asset manager, manages and launches the portfolio, takes the decision to appoint a certain external advisor of managing the portfolio or not. In the past before 2016, local asset managers focus on local equity funds and distribute the onshore funds through their direct sales force the most, till ETF bond funds and Target Maturity Bond Fund fueled the asset growth of onshore funds. (refer to https://www.navigateconsultant.com/post/golden-cross-of-taiwan-onshore-offshore-mutual-funds-bond-etf-and-target-maturity-bond-fund-are-hot). However, since the regulator watched out the over-heating of bond ETF and TMFs, SITEs are facing pressure to find new products to maintain the asset growth, The demand of sub-advisory business from the SITEs has soared exponentially. In this condition of white labeling, the fund is made by offshore fund managers while it’s packaged and sold by local SITEs. The SITEs’ function is more like a marketing center of collecting product idea from the market, implementing the marketing blitz and manage communication through all relevant parties. Usually they will have yearly plan to launch targeted numbers of funds a year, i.e. one fund in a quarter for aggressive SITEs or maximum 3 funds for ordinary SITEs. The preparation of a fund launch will take more than 2-3 quarters usually.


  • Custodian bank: Since each mutual fund’s asset shall be custodied by an independent trust enterprise, and banks have tight custodian schedule usually, it’s quite common to see that several SITEs are competing a certain custodian bank’s schedule slot; also, the custodian bank usually would play as the main distributor of the fund, to guarantee a certain asset volume, the barging power of the custodian bank is great. According to Regulations Governing Securities Investment Trust Funds, given the circumstances that the trust enterprise or bank and the SITE are each subsidiaries of the same financial holding company or, are affiliated enterprises, the bank may not serve as the custodian institution of the fund. Therefore, besides the bank in the same group as the main co-sale distributor, the SITE more often than not has to take much effort of seeking the strategical custodian institution.


  • Distributor: When a SITE considers to launch a mutual fund, it will define and analyze the main sales force at first, whether by bank, by insurance agent or electronic platforms etc. Fund distributors in Taiwan include banks, SITE, SICE, securities companies, insurance companies, and other financial advisers. Given the broad reach of branch networks, banks represent a significant majority of the volume of fund distributions. Some of the local banks in Taiwan also have their proprietary range of funds, which may get priority when seeking shelf space. The custodian bank usually represents the main bank distributor, having the ball in its court, and there are several co-sale banks to support the sales. Insurance companies usually represent the second large fund sales. They are taking an increasing market share year by year as many insurance policies made in conjunction with Investment Linked Products (ILPs) and TMFs. The SITE from time to time has to take the consent from the main sales distributor first, to understand the potential sales volume, before they initiate the portfolio construction.


NIC works with the parties simultaneously when we support our fund partners to develop the advisory business in Taiwan, to ensure the business to be promoted efficiently and effectively. Please contact us and welcome more discussion!