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Asset Management/Pension
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보고서 1
Behavioral Economics and Investor Protection [21-03]
Senior Research Fellow Lee, Seokhoon and others / Mar. 09, 2021
Behavioral Economics and Investor Protection

As households’ financial assets increase, more people are routinely exposed to the financial services, such as general consumer goods. In addition, the demand for financial services of the elderly and those with lower financial literacy has been increasing significantly. Recently, several structural changes such as the popularization of financial investment products, the emergence of complex financial instruments, and the growth of retirement pensions have highlighted problems of investor protection due to lack of the customers’ financial literacy or behavioral bias. Behavioral bias refers to a psychological mechanism that systematically triggers human behavior deviated from the rationality assumed by traditional economics. Thus, to the extent of behavioral bias, investor protection policies based on the premise of human's rationality may not be effective. This is also the reason why countries are paying attention to the behavioral insights in establishing investor protection policies.
Recently, the Korea’s financial authority has also been moving to apply behavioral insights to the investor protection policies. However, any research has not helped the financial authority to establish the policies suitable for our reality from a behavioral perspective. Therefore, our study takes the first step by focusing on the behavioral bias of investors choosing financial investment instruments in the capital market and discusses how to protect them from a behavioral perspective.
We look at the behavioral characteristics of Korean fund investors from a behavioral perspective. It is found that the financial literacy and the acquired information of fund investors are not sufficient. First of all, efficient financial education is needed to enhance fund investors’ financial understanding in order to lower the fund investors’ dependence on others and  induce the rational decision based on their preferences. For effective financial education, the behavioral characteristics of persons subject to education should be analyzed in advance and effective goals subdivided according to their incentives and characteristics for participation in financial education be presented. Improvements to fund-related disclosures are also needed to enhance investors’ access to and understanding of disclosures. Guidelines for key information to be provided to investors should be drawn up and forms of disclosure should be designed so that investors can easily understand the information and fully consider it for their investment decision. Finally, improvements are required to reduce the likelihood of conflicts of interest between financial institutions and investors.
The fundamental cause of behavioral bias in the decision- making process of investment in derivative linked securities is the complexity of the product. In particular, financial institutions have the incentive to design revenue structures and establish marketing strategies by utilizing investors’ behavioral bias to maximize profits. Therefore, to ensure investor protection and reliability for complex financial instruments such as derivative linked securities, a policy instrument needs to be devised to correct behavioral bias or reduce its influence so that the principle of self-responsibility can be accepted more effectively. Major policy measures have already been introduced in Korea. Nevertheless, to strengthen the effectiveness of the regulations, further discussions on improving the system seem to be needed. First, it is necessary to ensure consistency in the application of investor conformity principles. Second, it is necessary to improve the risk rating system for derivative linked securities and the format of information provision. Third, the sales activities of financial institutions that cause investors' behavioral bias should be eradicated. Finally, the listing of derivative linked securities should be induced.
Korea’s DC retirement pension members put their pension assets mainly on the deposit or saving products, which is far different from the current structure of overseas DC pension assets, which places a high share of stocks. This may be due to DC plan members’ preference for safe management of pension assets. However, there seem to be more significant factors behind that. the first may be due to the lack of financial understanding of the retirement pension savings by Korean DC plan members since the retirement pension system was introduced not long ago. Secondly, it may be because Korean DC plan members choose or select the deposit products due to behavioral bias such as psychological accounting, peer effects, procrastination, and myopic loss avoidance. In response, we propose to introduce choice architecture for DC plan members who lack financial understanding or have no clear preference. Specifically, the introduction of default options, re-enrollment, tiered investment line-up, the institution supporting for small and medium-sized enterprises such as UK's NEST model, and effective pension information disclosure methods were proposed.
보고서 1
Overhauling Korea’s Trust Service Industry in the Era of Rapid Aging [21-01]
Senior Research Fellow Song, Hong Sun and others / Feb. 03, 2021
Reshaping Korea’s Trust Service Industry in the Era of Rapid Aging

This paper is purposed to come up with plans to develop Korea’s trust service industry, based on a comparative look at the regulatory framework across Korea and other nations including Japan and the US including a series of largely economic analyses on the industry’s current status, problems, and future potential. The results confirm the stalling growth of Korea’s trust service industry. Also found is Korea’s future growth potential in terms of both the absolute and relative sizes, both of which suggest ample opportunities of the industry as a wealth management service, given Korean conditions such as the rapid aging, abruptly low growth and low interest rates, and household assets concentrated in real assets.
Despite the potential and Korea’s current conditions favorable to trust services, trust market activity and growth in Korea are somewhat constrained by its structural limits with regard to its regulatory framework, market structure and a mismatch with client demand. Among others, the market has turned to a place of the logic of growth where trust service providers are selling arbitrage financial products, somewhat far away from the desirable growth path responding to the aging demand. This led to a mismatch between household demand and the actual market structure centering on money trusts at which financial firms have strength. Although real assets account for almost 80% of household assets in Korea, they are still sitting outside trust services. This is hindering the growth of trust services, a business that is supposed to help more assets to be securitized or to generate income streams in an aged society. Last but not least, Korea’s trust service market lacks the function of transferring property rights via gifting, inheritance, or donation. Transfer of property rights is one of the strongest functions in trust services involving a tri-party contract, but has yet to take hold due to Korea’s underdeveloped market for family trusts.
Against the backdrop, Korea’s trust services market needs a regulatory reform in the direction that suits the following three trends, each of which becomes a sub-theme of this paper. First, the market should fully reflect the asset composition of households that constitute major demand for family trusts. The most important improvement towards that end is to facilitate a “comprehensive asset trust service” that allows diverse types of assets to be included in a trust. Korean households usually hold much larger real assets than financial ones, but current trust services are centered on money trusts only. This is weakening household demand for adopting trust services as part of family wealth management plans. Demand for transfer of property rights via will substitutes, inheritance, gifting is expected to rise further with the current aging trend. The types of trust property include not only cash, but also intangible assets such as real estate, family businesses, physical assets, etc. To help all of those assets to be included in trust services, a regulatory reform is needed, for example, a negative system for types of trust property, etc. Second, the current market structure should facilitate more competition so that more services are developed for retail customers. Although competition exists in the current market, some segments of the market such as annuity trust services are facing loser competition with their service still hovering around regulatory arbitrage and lacking innovation. Furthermore, trust services at present have limited customer contact points. Taking those into account, this paper tries to assess the level of competition in trust services, and proposes a regulatory reform on trust business approval. The gist of the proposed reform lies in a change in the unit of business approval to permit diverse small licenses. Third, the current tax regime needs improving so that it becomes more beneficiary-friendly, facilitating the overall market. Tax planning is a crucial part of incentives in wealth management. In sum, the proposed regulatory reform in this paper is about a new trust service regime improving product consistency as well as beneficiary convenience.
보고서 1
Analysis of Securities-based Crowdfunding Markets in Korea [19-02]
Research Fellow Park, Hyejin and others / Jan. 21, 2019
This paper studies the characteristics of Korean securities-based crowdfunding markets and the behaviors of investors during the crowdfunding campaigns, thereby providing policy implications as to improve the current system. Securities-based crowdfunding is a new financing method for startups that are too small to be funded by angel or venture capital and financing from their friends and family are not enough to cover their financing needs. Besides, securities-based crowdfunding has other benefits. For example, professional investors such as angels and venture capitalists can use the crowdfunding outcome to predict the future of demand of the goods or assess the future returns of their investement projects. 

First, we review the concept of securities-based crowdfunding and its relations to other venture investors, and then discuss some features of main participants of securities-based crowdfunding markets such as entrepreneurs (issuers), individual investors, and platforms. Majority of issuers that attempt to raise capital via crowdfunding are early ventures, but some of them tend to be more suited to crowdfunding than others. For example, very high-tech firms whose business models are based on complex technology are less likely to be a good fit since unexperienced individual investors without knowledge in that area may be hesitant to commit their money to that venture’s project. In terms of crowdfunders, we focus on their investment behavior during crowdfunding campaign. We observe herding behaviour of the investors in the early days of funding windows, implying that the early performance has significant effects on the final funding results. Regarding platforms we overview the crowdfunding process operated by these platforms and compare their business models.

Next, we investigate the role of signals about hidden quality of the project and campaign-related information on funding success and investors’ decisions to commit financing. Our results show that backing by professional investors,  funding target, and campaign duration play a significant role for the funding outcome. However, we also find that hard information about the issuer’s ability such as performance in the past crowdfunding campaigns, certification as social company or venture firms have little or not impact on the funding outcome. Furthermore, we find that backing by professional investors have the opposite effects on funding success and the other small investors’ participation in crowdfunding; receiving more funding from professional investors contributes to funding success but it might decrease the chances that other small investors participate in that project. Finally, we discuss the policy implications of these results.