The Saturday newspaper (Straits Times) “Unit trust fees slashed to woo investors” reported that a price war has broken out on unit trusts. Since DBS slashed its sales charge to 1% in early October, fundsupermart.com reduced its sales charge for its best 11 funds to 1%. It was also reported that Standard Chartered is also offering 1% for selected customers. Although not reported, dollarDEX website says “Recommend a friend, relative or colleague to open an account at dollarDEX and you both could get a free trade, up to any dollar value.” In other words, 0% sales charge.

Frankly speaking, what’s the difference between 1% and 0%? Why bother to give 1%? Might as well give 0% and throw in a free gift or gift vouchers! But seriously, this is what I call commoditization. The distributors are unable differentiate themselves and have to resort to price cutting. Anyone who is in business will know that to compete solely on price is a sure formula to be commoditized. A fund say Aberdeen Pacific Equity Fund is available from distributor X and distributor Y. X and Y sells the exact fund. There is no reason why anyone would buy from X that charges a higher sales charge than Y. It is illogical just to buy from the more expensive one. If anyone would to buy from X it implies X is giving something else that is value more money. For example, perhaps X can offer free switching or a sophisticated online platform or perhaps free magazines or market updates. Whatever the reason, if X and Y do not provide anything else extra, an investor will just buy from the cheaper one.

Financial advisers who are engaged in such price war will surely die fast and fury. I have been asked many times by other financial advisers on what to do in such price war. I told them simply – do not sell products and they will avoid the problem altogether. Apparently, hardly anyone understands what this really means.

Some financial advisers are able to charge a full 5% sales charge because they are in the position to differentiate themselves in such a manner that their clients do not mind paying for it. In Saturday newspaper it was reported that an investor said: “Basically, I buy whatever my financial planner recommends, and the sales charge doesn’t really bother me,” said Mr. Cheng. For such successful financial planners, they will be better off getting their clients pay for the sales charge directly to them and recommends better instruments like exchange traded funds, index funds, etc. Of course, this further commoditized unit trusts to totally worthless.