MAS eases rules on ETF transactions

Singapore

THE Monetary Authority of Singapore (MAS) has eased rules on financial advisers relating to investing in exchange-traded funds (ETFs) on behalf of retail investors.

Previously, financial advisers could only advise clients to buy ETFs from brokers, instead of directly helping them with the transaction through a platform.

Financial advisers told The Business Times that the regulator has recently, on a case by case basis, effectively granted permission for them to facilitate the buying and selling of ETFs for clients. This is provided that clients' orders are transmitted in writing or electronically, and not over the phone, they said.

BT understands that some 20 firms have applied to do so, some because of the opportunity for more business from a lower-cost investment product.

The ability to transact in ETFs directly is important as clients do not want to have to manage their portfolios, firms said. However, they said that it was still early days to judge if business will see a boost.

Christopher Tan, chief executive officer of retirement planning firm Providend, said that the firm, at the end of February, received permission from MAS to pass on customers' ETF orders.

Providend has just finalised operational aspects relating to the change and launched ETF portfolios of various risk profiles for clients to invest in. "All along, we've advocated ETFs, just that now we can earn some money managing them," Mr Tan said.

The yearly fees that Providend charges for maintaining an ETF portfolio are based on a percentage of assets under management and are lower than those it charges for a unit trust portfolio, Mr Tan added.

This is because for unit trusts, Providend needs to perform fund selection, compare various unit trusts, interview fund managers, and monitor performance on a monthly basis.

"Going forward, I strongly believe ETFs are the way to go. It's cheap, I think it will gain some traction," Mr Tan said.

Kevin Wilkinson, chief executive of Unicorn Financial Solutions, said that he received permission from MAS to pass on customers' ETF orders last month.

"We are having a look at whether our strategic allocations, which are currently done through managed funds, should use ETFs," he said.

Currently, a fairly aggressive portfolio might have exposure to China, oil, and gold with gold exposure coming via the SPDR Gold ETF.

ETFs are baskets of securities known to be cheap and transparent ways of passively accessing a market. ETFs are listed on exchanges - hence the name - and offer significantly lower management fees than actively-managed mutual funds or unit trusts. There is also literature showing that over time, most actively-managed funds do not beat their benchmarks that passive ETFs replicate.

Most ETF trading takes place in the US, though one can also access numerous markets through ETFs traded on the Singapore Exchange (SGX).

Regulatory proposals in the past year have been aimed at giving retail investors access to a wider pool of investments. SGX as well as local banks have rolled out initiatives encouraging retail investors to buy ETFs.

Last June, in a public consultation paper, MAS proposed to expand the Securities and Futures Act (SFA) Dealing Exemption to allow financial advisers to "help customers transact in both listed and unlisted collective investment schemes (CIS) if such dealing is incidental to their advisory activities".

This will help financial advisers provide better services, MAS said.

Currently, financial advisers can transact in unlisted unit trusts for clients, but not in listed CIS.

Listed CIS include ETFs and real estate investment trusts (Reits). However, MAS has only allowed financial advisers to apply for the exemption on ETFs only.

Despite the latest development, some financial advisers remain cautious on the use of ETFs. For instance M Salim, chief executive officer of Avallis Financial, said that he was concerned about the risks to investors of a type of ETFs known as synthetic ETFs, which use derivatives to track market benchmarks.

Also, clients might not get excited about merely passively tracking the market, he said. "People invest in stocks and shares because they think they can beat the market."