Wrap accounts: Recent Trends and Countermeasures
2010/09/25 Leave a comment
The wrap account market in Korea is becoming more popular than ever as there has been a growing demand among investors for more customized services. Unlike the mutual funds, the assets invested in wrap accounts are managed on an one-on-one contract basis between the investor and the brokerage, providing services that meet an individual’s specific needs. Particularly, those who seek higher return on their investment are showing keen interest in equity-type wrap accounts which allow them to heavily invest in a few stocks recommended by the investment advisors. Along with customers’ growing demand, the brokerage firms are also aggressively marketing their tailored asset management services.
Current market situation of wrap accounts
In March of 2009, sales of wrap account totaled 1.3 trillion Korean Won (KRW). However, 27.6 trillion KRW belongs to discretionary wrap account as of May, 2010. Especially advisory wrap accounts are growing much rapidly compared to the other wrap products. It was 28.4 billion KRW in March, 2009 but it now reached more than 1.36 trillion KRW, a 48 times larger than in 2009.
Figure 1. Current state of wrap account
Regarding current status of the market, the Financial Services Commission (FSC) intends to intervene the wrap account market by revising regulations and reinforcing the Financial Supervisory Services (FSS) to protect the customers.
Problems of overheated warp account market
The FSS warns that the wrap accounts could cause following problems to the customers and the market.
Danger of huge loss
First of all, wrap account is not under regulation on investment diversification. It means broker who is in charge of a wrap account would be able to invest 100% of customers’ money on few assets. It makes more profit when price of stocks that broker invested is escalated. However, if the stock prices drops significantly, profit rate would be decreased and since diversification is not fully adopted to wrap accounts, it will result in a huge loss without any protection.
The securities companies are struggling to make more contracts with customers to achieve No.1 in the market share in wrap accounts. This could lead them to overheated marketing and manage wrap accounts in abnormal way. Some securities companies are suggesting certain wrap account services to customers by showing off other customers’ profit rate and etc. It is illegal to suggest in this way since nobody can sure that one’s profit rate would be same as others’ profit rates.
Other ways of illegal management could happen by to taking away customers’ right to participate in the wrap account. Under the regulation, the securities companies must assure customers’ right to check their portfolio and to change the way of management.Charging brokerage fee in addition to discretionary investment commission cause problems since this would evoke conflicts of interest. In other words, if the securities companies can charge brokerage fee to customers, they would artificially increase transaction turnover to earn more brokerage commission.
Financial authorities’ counter plans.
Since June, 2010, the FSS operated special task force to revise and improve regulations on the wrap accounts. There are several amendments to secure management of the wrap accounts and protect customers from incomplete sales of the products. The FSS would reflect more opinion from the financial market regarding the amendments and then add revised regulations.The wrap accounts might be good products for customers to invest their money in efficient way to maximize profit. But to make their investment more secure, customers have to check details of the financial products even if the products seems to be sound and solid. No matter how much customers has lost their profit from the wrap account, responsibilities on the loss belongs to investors themselves. As the customers report abnormal business activities of the securities companies, the FSS would fully support customers and investigate the problems accordingly.
Kyoungmin Kim (firstname.lastname@example.org)