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🇰🇷 South Korea /Economy & Trade

100 million won invested, 78 million won earned, but 17 million won paid in fees: Why bank ETFs?

From Hankyoreh · () Korean

Translated from Korean, summarized and contextualized by DistantNews.

At a glance

News Named sources Context piece
  • A 70-year-old investor earned 78.42 million won from a 100 million won investment in bank-managed ETFs but paid 17.04 million won in fees by choosing a front-loaded fee structure.
  • Financial authorities are investigating whether banks recommended disadvantageous fee structures to customers, particularly the elderly, who predominantly use bank-managed ETF trusts.
  • The Financial Supervisory Service found that short-term investors disproportionately chose front-loaded fees, which are typically less beneficial for shorter holding periods compared to back-loaded fees.

A stark example of high fees eroding investment returns has emerged in South Korea, where a 70-year-old investor reportedly paid 17.04 million won in fees for managing 100 million won in exchange-traded funds (ETFs) through a bank trust. While the investment yielded a profit of 78.42 million won after fees, the substantial commission significantly impacted the overall return.

The investor had opted for a "front-loaded" fee structure, which charges a commission upfront when purchasing the ETF. Had they chosen a "back-loaded" structure, where fees are proportional to the holding period, the commission would have been a mere 560,000 won, increasing the net profit to over 103 million won.

We need to inspect whether disadvantageous fee structures were recommended to customers.

— FSS OfficialStating the intention of the Financial Supervisory Service to investigate bank practices regarding ETF fee recommendations.

This case has prompted the Financial Supervisory Service (FSS) to investigate whether banks are unduly influencing customers, especially the elderly who are frequent users of bank-managed ETF trusts, to select fee structures that are less advantageous for them. Data shows that the average age of ETF trust account holders is 59, with nearly 30% being over 65. The majority of these accounts are opened through in-person branch visits, suggesting a reliance on bank advisors.

We plan to review the fee system from scratch in discussion with the industry and associations.

— FSS OfficialOutlining the FSS's plan to re-evaluate ETF fee structures.

The FSS analysis revealed a pattern where investors with short holding periods, less than a year, frequently selected the front-loaded fee option, despite the back-loaded structure being more financially beneficial for such durations. For contracts sold within 10 days, 1 month, or 3 months, the front-loaded option was chosen in 98%, 96.4%, and 93.8% of cases, respectively. Conversely, for holdings exceeding six months to a year, the front-loaded choice dropped to 57.5%, and for over a year, it was only 40.9%.

In response, the FSS plans to review the entire fee structure in consultation with the banking industry and associations. They have also instructed banks to exclude fee revenue from performance metrics used by branch employees to discourage the recommendation of disadvantageous fee plans.

We have guided bank branches to exclude fee revenue, which they have used as a performance indicator, from their metrics.

— FSS OfficialExplaining a measure taken to prevent banks from prioritizing fee income over customer benefit.
DistantNews Editorial

Originally published by Hankyoreh in Korean. Translated, summarized, and contextualized by our editorial team with added local perspective. Read our editorial standards.

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