Due to Consecutive Large Company Conversions to Private Equity Funds... Last Year, Full-Time Investment Advisory Firms' Contract Volume Down 20%

[Asia Economy Reporter Eunmo Koo] As large full-scale investment advisory firms continue to convert to private equity funds, the contract volume of full-scale investment advisory firms decreased by nearly 20% last year.

According to the Financial Supervisory Service on the 21st, the total contract volume for advisory and discretionary services of full-scale investment advisory firms (engaged in investment advisory business, discretionary investment business, and combined advisory-discretionary business) for the 2019 fiscal year (April 2019 to March 2020) was 12.2 trillion KRW, down 3 trillion KRW (19.7%) from 15.2 trillion KRW during the same period last year. Among the total contract volume, the top 10 firms accounted for 8 trillion KRW, representing 65.4% of the total.

The advisory contract volume decreased by 700 billion KRW (8.2%) from 8.5 trillion KRW to 7.8 trillion KRW due to the continuous conversion of large full-scale investment advisory firms into specialized private equity collective investment business operators. The discretionary contract volume also declined by 2.3 trillion KRW (34.3%) from 6.7 trillion KRW to 4.4 trillion KRW, as discretionary contracts from institutional investors such as pension funds shrank due to poor investment returns.

With the contraction of contract volume, net profit turned into a net loss. As of the end of March this year, the net loss was 37.7 billion KRW, a decrease of 45 billion KRW compared to the net profit of 7.3 billion KRW during the same period last year. Among a total of 201 firms, the proportion of loss-making companies rose by 14 percentage points from the previous year to 73% (146 firms), and profitability declined, with the return on equity (ROE) falling by 8.8 percentage points from 1.3% last year to -7.5% during this period.

By segment, fee income decreased by 9.4% (9.1 billion KRW) from 97.2 billion KRW last year to 88.1 billion KRW due to a reduction in discretionary fees caused by the decline in discretionary contract volume. Proprietary asset gains and losses (securities and derivatives investment gains and losses) also recorded a loss of 10 billion KRW, down 34.5 billion KRW from 24.5 billion KRW last year, as the stock market sharply declined due to COVID-19, resulting in significant proprietary asset management losses in the first quarter.

The Financial Supervisory Service stated, “The top 10 firms account for 65.4% of the contract volume in investment advisory and discretionary contracts among full-scale investment advisory firms, indicating a concentration of contracts in large firms. We will strengthen monitoring of contract volume trends, financial conditions, and insolvency risks of large firms, and seek support measures to expand the revenue base of small and medium-sized investment advisory firms that have a high risk of insolvency.”

This content was produced with the assistance of AI translation services.