Why Are Public Funds’ Service Fees Still Rising Against the Trend? (AI Translation)

【周刊提前读】公募降费让利 为何销售服务费还在逆势增长？

In July 2023, China's Securities Regulatory Commission launched a significant fee reform plan aimed at optimizing the public mutual funds' fee structure over two years with a three-phase approach targeting management, transaction, and sales fees. The reform's principal goal is to benefit investors by reducing costs [para. 1]. Initially, the plan focused on reducing management and custodial fees, with limits set at 1.2% and 0.2%, respectively. Subsequently, transaction commissions were targeted, with the commission rate reduced from 0.08% to 0.05%. These reforms have led to a noteworthy decline in the average rates for equity and mixed funds to 0.69% and 1.06% by November 2024, down from 0.85% and 1.26% at the start of 2023 [para. 2]. Additionally, management fee income declined by 13.80% year-on-year in the first half of 2024, illustrating the broader impact of these reforms [para. 3].

China’s public fund industry bears substantial sales expenses, with sales service fees predominating, making up over 70% of the costs. Despite an overall downward trend in fees like subscription, purchase, and redemption fees, sales service fees actually increased, showing a 12.68% rise in 2023 and 13.12% in mid-2024, primarily due to the popularity of "zero-rate purchase" C-class fund shares [para. 4]. These Class C shares, despite appearing to lack subscription fees, accumulate daily sales service fees which increase over time [para. 5]. Industry insiders point out a contradiction: while regulators push for long-term holdings, sales channels encourage short-term investments via C-class shares [para. 6].

Furthermore, an ongoing concern is the high proportion of management fees allocated as trailing commissions to sales channels, especially harmful to fund management revenue. These commissions, though partially reduced, still represent a significant portion of the costs paid by fund management companies, impacting profitability [para. 7]. Efforts to curb issues like "redeeming old to buy new," where investors shift from existing to new funds, highlighted the need for reforms encouraging steady fund holdings and sustainable marketing strategies [para. 8][para. 9]. Potential upcoming reforms might attempt to reduce institutional trailing commissions from 30% to 20% for non-equity funds [para. 10].

Moreover, the incentive structure for fund sales in China anticipates modifications focusing on balancing customer satisfaction, long-term profitability, and aligning fund companies’ and investors' interests. However, entrenched practices and market dynamics, such as banks' dominance in fund sales by relying heavily on transaction volumes, make implementing these changes challenging [para. 11][para. 12][para. 13]. Third-party platforms, despite aggressively pursuing retail markets, encounter difficulties given their dependency on banks for payment processing, creating additional costs, and adding to their financial stress [para. 14][para. 15][para. 16].

Ultimately, the ongoing reforms urge a shift towards direct institutional sales, minimizing reliance on third-party platforms, streamlining fund transactions, and further simplifying redemption fee structures to favor long-term investments. Concrete regulatory actions aim to streamline sales fees, thus favoring a more investor-centric approach while facing inherent industry resistance due to the complexity and various vested interests involved. The broader effort underscores a necessity for transitioning from purely sales-driven strategies towards substantive, value-added long-term investment guidance [para. 17][para. 18].

This transformative journey in China’s mutual fund industry reveals the pressing need for aligning investor interests with operational efficiencies, as regulators strive to reshape and balance the sector's competitive landscape [para. 19].