Boutique fund fee revision needs rethink

FIRST off, I would like to state that I am very much grateful to the Securities Commission (SC) for what they have done for me and my organisation.

Without their professionalism, trust and support, there would have been no way for me to break into the industry and build a fund management company in the country.

That said, the impending fee revision by the SC, which will come into force in 2026, will have a huge impact on a boutique fund management company like ours.

I prefer not to speak about the impact on other capital market intermediaries such as brokers, unit trust companies, corporate finance houses and others, as these are not within my scope of management.

However, I believe I can speak on behalf of the boutique fund management space, considering that I have built the company from the ground up, experiencing the struggles before achieving the stability we have today.

While the SC has provided several opportunities for feedback, both through in-person sessions and email, the outcome remains unfavourable for us.

To put things into context, the fee revision by the SC comes in many forms. There are components related to annual licensing fees, fees for funds launched, documentation fees, application fees and other ancillary charges.

What has the most direct impact would be the 0.0125% annual fees on assets under management (AUM) or a fixed floor of RM20,000 per annum (whichever is higher) charged to a boutique fund management company like ours.

For illustration, if a fund manages RM1bil, the annual fees incurred would be RM125,000 based on 0.0125%, as this amount is higher than the RM20,000 minimum, and vice versa.

Now, in the case of a boutique fund – which faces restrictions such as being allowed to market its funds only to sophisticated investors (not ordinary retail investors) – to my knowledge, none in Malaysia has an AUM beyond RM300mil.

In fact, out of the 14 boutique fund management companies, the majority are struggling to make ends meet.

We are considered one of the few that are profitable.

Yet despite having more restrictions than a full‑fledged fund management company, we are subjected to the exact same fee structure as a full‑fledged firm with a much larger AUM.

The RM20,000 fixed floor for a boutique fund management company is simply not reasonable.

Origins of boutique fund management

In 2015, the SC introduced the boutique fund management framework, similar to Singapore’s.

The idea behind this category of licence, unlike the full‑fledged fund management licence, is to encourage new entrants and foster entrepreneurship within the capital markets, specifically for fund management purposes.

With this new category of licence, fund managers who want to start their own shop or manage a smaller pool of clients finally have an avenue.

The regulators also hope that more capital can be unlocked and that this will foster a more vibrant capital market for the country. This is a good pro-development policy.

Unfortunately, when formulating the fee revision structure, we were subjected to the same annual fee requirements as full‑fledged funds, which have much bigger AUM, larger workforce, broader agency networks and also the flexibility to market to retail clients.

When there is a difference in licence category, naturally there should be different treatment for us. That is only fair; otherwise, it would essentially negate the benefits of having a different licence category.

Private equity and venture capital has it easy

There is also a differentiation when it comes to private equity (PE) and venture capital (VC) funds.

Let’s take one of the largest PE funds in Malaysia, with an AUM of US$3.1bil (RM12.83bil), as an example.

The annual fees they are required to pay to the SC is fixed at RM10,000 at the entity level, with no percentage charged on the AUM based on the current guidelines.

Is it reasonable for them to be subjected to only RM10,000, compared with a boutique fund management company like ours paying at least double that amount per annum?

Similarly, in the VC space, there are no less than 15 VC management companies (VCMCs) that, I am aware of, that have obtained AUM directly allocated from various government-linked investment companies (GLICs) and government entities to the tune of RM20mil and beyond.

They too are required to pay only RM10,000 per annum.

In our case, we build our AUM entirely through private-sector clients without government funding. Our AUM growth is entirely due to organic and consistent performance returns.

Despite bootstrapping from day one, we are made to compete at the same level as full‑fledged funds, with more restrictions but the same fee category.

If that is the case, is there still a need for a boutique fund management licence category?

Should it not then be repealed and consolidated under a single licensing category?

Revision ought to be gradual

There is no doubt that the SC has valid grounds to justify a fee revision, as some components have not been adjusted in the past three decades.

With increasing complexity in the capital markets due to new asset classes, capital intermediaries and advancements in technology, regulating market participants requires more effort.

For example, more talent and resources are needed to combat unlicensed and fraudulent investment schemes and scams, including addressing rogue players in the markets.

Enhanced surveillance and legal actions also require sufficient funding. My only request is that the revision be gradual and paced, especially for new capital market intermediaries with less than five years being in operation since being granted a licence by the SC (essentially startups).

Why five years? When we applied for our licence a few years back, the SC required a cashflow projection, including revenue, cost, and profitability over a five-year horizon.

At that time, our licensing and compliance costs only factored in a normal inflation rate per annum, as input into the projection.

Today, we are entering our fourth year, still within the five-year projection period, but our licensing and compliance costs have effectively increased at least tenfold.

This is neither reasonable nor fair to a new licensee.

Therefore, a grace period before the new rates come into force should be considered for licensees with less than five years of operation.

This was also the feedback I provided to the SC during the closed‑door industry dialogue session.

A more friendly approach

Being stuck in between is never easy.

We are neither too big to hold sway, nor too small to demand favourable treatment.

It is much like the middle-income or M40 population.

A more reasonable consideration and a friendly approach should be accorded to us, given our size, growth and contribution to the capital markets.

Boutique fund management companies like ours provide an avenue for clients that is distinct from conventional mutual funds or unit trusts.

The personalised service and consistent returns we have delivered address a gap that has long existed in Malaysia’s capital markets.

We help regain the trust of clients who might otherwise only focus on investing in overseas markets.

Fee revisions are never popular, but I sincerely request that the SC deliberate on the impact of the changes on the boutique fund management category,

and consider a more reasonable fee hike threshold.