Do Higher Sales Fees Mean Better Service?

“I asked a bank staffer about a fund and he said there is no such fund. The bank was no doubt the sales channel of the particular fund, but the staffer was not aware of it. What kind of service can I expect when the staffer does not even know what he is selling?”

Kim, an office worker, (32·Munjeongdong, Songpagu, Seoul) recently searched for information on a fund instrument on his own and bought it through the internet.

Because the instrument he bought was not for online sales exclusively, the `sales fee` was the same as when buying through a bank counter or a bond company. Nevertheless he thought consulting a staffer of a sales company was a waste of time because of his experience.

With the growing popularity of fund investments fueled by the boom in the stock market, controversy is emerging regarding the propriety of fund sales fees. Sales fees are the cost paid to fund sales companies, such as a bank or a bond company, over the period of investment.

According to the Korea Securities Research Institution on November 2 the average fund fee of domestic stock-type funds currently is 2.31 percent per year (weighted average applied), which is much higher than the average of 18 major OECD nations (1.87 percent). Fund fees are the sum of sales fees from which sales commissions are excluded, operation fees, and other costs.

Fund fees are high in South Korea because sales fees take up a large portion of the cost. While the average sales fee in major OECD nations is 0.63 percent, it is more than double, or 1.55 percent, in Korea.

While the proportion of commissions paid only once at the time of sales is higher with foreign sales companies, Korean companies are raising most of their profits through sales fees collected throughout the period of investment. When one invests 10 million won in a fund and turns a profit of one million one a year later, 170,000 won out of the profit goes to the sales company.

Competitive system needed for better service quality-

The main issue of the controversy is that the sales company is not offering services to match the amount of money they are earning. Investors complain that even a basic consultancy is not provided, as in the case of Kim.

Regarding this, economics professor Won Seung-yeon in Yeungnam University published an article in the Bulletin of the Asset Management Association of Korea, saying, “High sales fees do not necessarily guarantee good operational performance."

Researcher Kim Jae-cheol at the Korea Securities Research Institute said, “Because the sales performance of funds is mostly determined by distribution routes in South Korea, operation companies are led to entrust sales to them despite high sales fees."

Because of this, some point out that sales fees need to be lowered, even though this would mean that sales commissions, which are paid once, will rise.

Economics professor Shin In-seok of Chung Ang University said, “It is difficult to expect competition among sales companies in a situation where the income (fee) is the same, whether the consultation takes an hour or five minutes. We should lower the sales fee that lets sales companies earn money with no labor and adopt a system that imposes commissions on every transaction, so that sales companies will compete among themselves on price and service."

Securities businesses responded that, “When a commission is imposed for every transaction regarding fund sales, it can hinder long-term investment because sales companies will recommend making and canceling fund contracts repeatedly.”

But others say that, “[the commission system] will encourage long-term investment because it will cause people to make careful selections before making investments or changing instruments."

swon@donga.com