This study aims to identify the characteristics of demand for financial investment products in Korea and investigate whether any problems like conflicts of interest or mis-selling occurred in the sales process. In the demand analysis, we assess the degree of substitution or market segmentation between the products and explore the key features of demand for each product using the nested logit model. In the distribution analysis, we examine several issues that might arise in the sales process due to the informational asymmetry or herding behavior. It consists of sales competition analysis, ELS returns analysis, and retail funds investors’ demand analysis.
First, we estimate the demand for the products with the quarterly sales outstanding amount data of domestic securities companies for funds, specified money trusts, discretionary wraps, and ELSㆍDLS from 2010 to 2016. The degree of substitution is estimated very low so that investment demand does not overlap between the products. This implies that domestic investors tend to invest only in a certain product. It is also estimated that demand for each product is segmented by the securities company’s size or its affiliation type. Moreover, the own-price elasticity of demand for each product is estimated less than one. This suggests that price competition is not so high because the demand for each product is essentially divided by the securities company’s characteristics.
As for the sales competition, we found a significant growth trend of sales in ELSㆍDLS and discretionary wraps only. We also found significant evidence for intensive sales competition in the analysis of ELSㆍDLS. Furthermore, some empirical results on ELS returns imply that ELS investors have experienced low rates of realized return because of the sales competition among the securities companies. For example, in the case of KOSPI200 ELS products, realized rates of return become significantly lowered as its sales proportion increases. Also, in this case, the higher the volatility of underlying index at the time of issuance, the lower the rate of return. Fortunately, this does not hold when the analysis period is limited to 2013 or after. Nonetheless, we cannot rule out the possibility that the past rapid growth of ELSㆍDLS is the result of the securities companies’ herding behavior in sales rather than the increase of wealth management demand.
Lastly, we investigate individual investors’ behavior by estimating their demand function of publicly offered funds or retail funds sold through 44 securities companies and 18 banks from 2010 to 2016 in Korea. Results show that demand for retail funds is segmented according to the seller’s affiliation type. Their demand is also elastic. It is, however, found that the own-price elasticity of individual investors is much lower than that of institutional investors. This implies that individual investors are exposed to the possibility or risk of paying higher TER or sales fees than institutional investors. More importantly, individual investors’ demand tends to decline significantly as the Sharpe ratio increases, which is the opposite of the funds sold by securities companies of which clients are mostly institutional investors. This is consistent with a recent pattern observed in retail funds, especially in equity funds that capital inflows during the downturn, and outflows during the upturn.
The aforementioned findings imply that domestic financial products such as funds, specified money trusts, discretionary wraps, and ELSㆍDLS do not function well as a means for wealth management. Furthermore, some empirical results on ELS and retail funds even suggest the possibility of conflicts of interest between financial companies and investors or mis-selling in the sales process. Hence, it is necessary to strengthen the functions of financial investment products to support Koreans’ wealth accumulation and retirement preparation. In this regard, it is important to not only expand the demand base and accessibility to these products but also restore investors’ confidence in distribution channels.