Hong Kong's small army of so-called independent financial advisers must be hoping the special administrative region will not follow Britain's Financial Services Authority, which is poised to outlaw commissions paid to advisers by fund managers and life insurers.
Instead they will have to collect fees from customers prepared to pay for their advice. However, in Hong Kong consumers are to be offered no such protection. Not only are advisers subject to the lightest of regulation, but there is no prospect of ending a situation in which so-called independent financial advice is tainted by conflicts of interest.
As matters stand, almost all Hong Kong advisers claim to be a providing a "free" service. But in practice they earn hefty fees on each product sold by collecting commissions from companies providing the investment funds. This clearly raises the question of whether their real customers are the individuals buying these investment products or the companies who actually pay them.
It is disingenuous for advisers to claim they offer a free service when the only investments they suggest are those that pay them hefty commissions, which amount to 5 per cent of the value of every product sold.
Because the fund companies pay this money up front to the advisers, they make sure their customers are as tied as possible to their funds by charging heavy penalties to prevent investors switching out of these products. In addition, they levy high management charges to claw back the cash they have had to advance to secure the sales of their products.
Were financial advisers, more accurately described as salespeople, offering purely impartial advice, they would at least occasionally suggest that their customers invest in assets that do not pay them a commission.
They never, for example, suggest investments in exchange traded funds, which are just like ordinary shares but give investors exposure to a wide spectrum of the market at minimal cost. And, here's the rub, ETFs generally perform much better than managed funds.
Meanwhile, who has heard of an independent investment adviser recommending temporarily leaving money in cash or other currencies, especially in highly volatile market conditions? Of course they don't, unless there is way to earn commission on this advice.
There is nothing wrong with salesmen or indeed with the payment of commissions.
The problem is the lack of transparency and, worse, the devious way in which this business is conducted. Because the industry is built on a web of misleading information, it invariably attracts an alarmingly high number of fraudsters, who go well beyond the bounds of misleading into the realms of stealing money from gullible investors.
Far too often they get away with it because their victims are too embarrassed to fight them in court or indeed afraid of even further losses in the course of a lengthy court battle.
One brave defrauded Hong Kong investor spent a small fortune pursuing her financial adviser through the courts and secured an entirely favourable judgment. But she has yet to get a cent back.
Another case is in the court this week involving the Hong Kong-based adviser Pauline Cousins. This is a criminal prosecution, but the authorities could only get two allegedly defrauded investors to testify. Judgment has yet to be delivered.
As a bad odour swells around the industry some of its practitioners, sensitive to their dubious reputation, have reinvented themselves as advisers who charge for their services. This is clearly a step in the right direction but do any of them return the commissions they get from the companies providing the investment funds? Of course, they do not because these sums are far higher than the payments customers make.
Yet if they are offering purely objective advice, as opposed to acting as salespeople, should they not stand to personally gain from any advice they proffer? In general, however, those who openly charge for their services are more likely to be providing objective advice.
The remarkable thing about this advice industry is that it could largely be abolished without any real consequences. Yet many personal investors have persuaded themselves that handling their own finances is just too complicated. They have devoted a great deal of time to earning their savings but when it comes to looking after their cash they throw up their hands in horror and declare that they simply cannot fathom how investment works. But it really is not hard for investors to learn how and where to put their money. Most of them have a low risk tolerance and a high incentive to preserve and modestly grow what they put away in savings. Learning the basics of low-risk investment is simple and servicing investments of this kind involves no more than setting aside a very short period of time each month.
The situation in Hong Kong is even simpler than in other jurisdictions because there are few complex tax advantages attached to various forms of investment.
Although this is easily explained, the personal financial advisory industry has pulled off the remarkable feat of persuading otherwise quite sensible people that their services are essential, and indeed that without the benefit of this advice they are exposed to perilous dangers.
Jake Van Der Kamp, a former financial columnist for this newspaper, says the one question no financial adviser can answer is: if you're so good at making money why are you not doing it for yourself instead of advising others?
Well, Mr or Ms Investment Adviser, what is your response?
Read Article: 'Free and Independant'advice is often tainted.
Stephen Vines is a Hong Kong-based journalist and entrepreneur