On 1st April 2010 12:02 AM a seemingly April fool’s joke was mass emailed out from one of the most popular online retail unit trust distributor. But it is already 2 April at this point of writing and it appeared it is no April’s fool joke. It appears to be real. We now witnessed the Commoditization Trap in ACTION.

This unit trust platform provider is imposing a new platform fee ranging from 0.2% pa to 0.5% pa on unit trusts invested through them. This is unheard off in Singapore because normally such additional fees are only imposed by financial advisers – known as “wrap fee” – for the purpose of providing on-going advice (although this is often not the case but that’s another story altogether). The new platform fee is in response to increasing operational cost such as increasing regulatory compliance and decease margins due to decreasing upfront fees.

What we are witnessing is an industry which is unable to differentiate itself and had to compete purely on price. The drastic reduction in sales charge was triggered by the online unit trusts industry itself and now it is unable to escape from such Commodization. For those who had not be following my articles on Commoditization Trap, it is a situation in which market players are unable to differentiate itself from each other and have to compete purely on price. Eventually, the market players will earn NO economic profit. Unfortunately increasing operational cost ( in Singapore, everything is sooo expensive) would mean that it has to find new ways to increase revenue. Thus, the online platform introduces the on-going platform fee. Will it succeed?

Frankly speaking, if investors are able to see value and that the cost is less than the value, it is considered a good bargain. But there are two problems. First, the supplier of service (this case is the online distributor) normally is unable to demonstrate value added. Second, the buyer of service is not able to identify value even if there was indeed one.

This is often the case of many financial advisers in the industry who is not able to demonstrate value to their clients. They just quote some benefit illustrations and expect to make a close like this. Many clients are also quite silly and they would just buy the product like this. For each case that I worked, I would normally take more than 20 hours of time spent and charge the client a fee based on time basis. From productivity standpoint this is the least efficient way in terms of (my) revenue per unit time. Very often, a product-based financial adviser would just spent at most 3 hours and could earn half the fee I earned. That’s why the product-based financial adviser is often rewarded with oversee trip incentives to Taipei, Nanjing, Shanghai, Tokyo, Taiwan, Rome, etc. I don’t mean to be sour-grape but that highly productive financial adviser provides no value at all and yet is rewarded with such huge reward. Why?

The simple reason is because clients are not able to differentiate between valued service and no-value service.

So what has this to do with the online distributor sending out this seemingly “April’s fool joke” which turns out to be reality? Frankly speaking, even if the online platform could prove itself to be able to provide additional value to justify the higher cost, I seriously don’t think buyers (investors) will be able to identify this additional value. The crux of the problem is that the supplier of service is operating in a market which has become Commoditized.

The question is this: Are YOU also a mere commodity to your employer?