The unit trust industry is being put to the test by the current market volatility and weak global growth. The returns of fixed income, equity and balanced funds have been low — and in some cases, even negative — in the past year, as shown by The Edge-Lipper Fund Table.

Disappointing returns, coupled with high upfront sales charges, are not helping the industry grow. Investors are increasingly looking at alternatives to get returns.

Financial technology, or fintech, is beginning to provide more investment opportunities. Equity crowdfunding, robo-advisers and online platforms selling gold are just some of the fintech providers that could disrupt the unit trust industry.

This raises many questions. Are unit trusts losing popularity? Are there better alternatives out there? What does the wave of fintech disruption mean for investors and industry players? What will the industry do to stay relevant?

A consensus view is that the unit trust industry will have to make changes to stay relevant. Ismitz Matthew De Alwis, CEO of Kenanga Investors Bhd, for one, says it needs to make adjustments or risk losing its lustre and appeal against this economic backdrop and investment environment. But he sees fintech as leverage and that it will be a positive for the industry.

Danny Wong, CEO of Areca Capital Sdn Bhd, does not believe that the fintech wave will impact the unit trust industry significantly. “There are more options available to investors with the emergence of fintech, especially over the past three years. But I don’t think Malaysian investors are mature enough for fintech firms such as robo-advisers to take off. I think unit trust companies that have started the switch to the advisory model will survive the fintech disruption and continue to grow,” he says.

De Alwis notes that most investors still appreciate the value of human conversation. This is one of the main advantages of the traditional distribution channel. But the question is: How can the industry leverage fintech to enhance this channel? He says the industry can leverage the robo-advisory platforms (these platforms

allow investors to buy into portfolios of exchange-traded funds due to their lower upfront fees).  

“In certain practice areas such as customer service, having the ability to connect with a human is crucial. In fact, human-machine collaboration will probably be the most effective for clients.

“Technology, such as robo-advisers, can help enhance client relationships by functioning as an additional investment planning tool — an extension of the human self. By performing certain mechanical calculations, they may also free up the human adviser’s time and let him provide more personalised attention to his clients’ particular needs.”

As distribution channels evolve, the landscape of the future may look less like robo-advisers threatening human advisers directly, and more like technology commoditising certain parts of what today’s distribution channels deliver, says De Alwis. It will force traditional advisers to adapt and become more efficient as they move up the value chain with investment advice and deeper client relationships.

“These will allow traditional advisers to keep their costs aligned with the value they deliver. Those who adopt the tools, technology and techniques of robo-advisers and then build on top of that with financial planning services and technology-augmented relationships will find themselves best positioned to remain relevant and thrive.”

The unit trust industry is looking into this with its regulator — the Securities Commission Malaysia (SC). This is in line with the recent setting up of an innovation and digital strategy unit, which will guide and work with the industry.

However, there is still work to be done and many permutations to consider, says De Alwis. These include looking into legal, regulatory and client engagement matters.

“Understanding consumer behaviour is the key for policymakers and us to design appropriate financial literacy initiatives and undertake policy interventions. Encouraging preparedness for income shock, financial distress and debt management is paramount as we move into the next phase. There are still building blocks to be put in place. But eventually, there will not be a need for an agency force to sell financial products,” he says.

De Alwis adds that steps are being taken and many companies are looking at having a balanced distribution channel and easier accessibility to their products. Product features will evolve, such as lower fees and better investment advice.

“Transparency will increase as providers need to up their game. Information is crucial. Investors can expect more evolution on disclosure, performance attribution, strategy and communication.

“At the end of the day, unit trusts are still relevant and have an integral role in one’s portfolio allocation. Diversification across various assets, from DIY to professional management, will continue to be relevant.”

De Alwis says industry players are starting to design their desktop environments for their specific needs and requirements and to benefit from seamless workflow through the deep integration between them and third parties.

“We are also looking to access innovation from the broader fintech community to leverage the knowledge, best practices and resources globally. Innovation and changes are indeed needed. But for the industry — as the product is still being sold, not bought — we need to be mindful of striking a balance,” he adds.

De Alwis says Kenanga Investors is transforming its advisory arm to provide competitive fee-based services to clients. He thinks local investors will be happy to pay for advice if they think it is worth the cost.

Another radical change the unit trust industry may see is less dependence on an agency force to sell its products. Areca Capital’s Wong says asset management companies will not just offer a spectrum of unit trust products, including those of other fund houses, but also provide high quality advisory services.

“We need to move on from product-pushing by the agency force. Our company is moving from a hybrid model — which combines an agency force with advisory services — to a full advisory model. This means there will be no sales charge. Our licensed financial planners will charge clients a fee ranging from 20 basis points to 1% for advisory services.”

Wong says Areca Capital is set to recruit 50 to 100 licensed financial planners over the next three years as it switches to the full advisory model. The challenge will be building its brand without an agency force pushing its products. Areca Capital is a non-bank-backed fund house competing against the big boys that are backed by financial institutions. He thinks it will take time and effort to grow its brand and track record to attract more investors.

Ho Seng Yee, CEO of RHB Asset Management Sdn Bhd, says unit trust companies will have to be more innovative in terms of the assets they invest in to stay relevant in the fast-changing landscape. “Malaysian unit trusts usually invest in traditional asset classes such as equity and fixed income. But there are some innovative products, such as property funds that earn regular rental income, which can be distributed in the form of dividends to investors,” he adds.

“Other innovative products would be private equity funds wrapped in a unit trust structure, which RHB Asset Management specialises in. But investors need to be well-informed of the underlying assets of a fund to determine whether they suit their risk profile.”

At the moment, Ho says, most of the funds that invest in alternative assets are only available to sophisticated investors. He looks forward to the time when they will be offered to all retail investors so that they can also enjoy the benefits of these innovative products.

Sharizad Jumaat, CEO of RHB Islamic International Asset Management Bhd, says unit trusts continue to be relevant as fixed income funds are a platform for retail investors to be exposed to the bond market. “Cost-wise, we have to send our fund managers overseas, to countries like the Philippines and Thailand, to look for companies with potential. It takes time to do the research before deciding which companies to invest in.”

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