[Viewpoint] Priming an investment culture

With the recovery of the economy, the stock market is bouncing back sooner than expected. As the market becomes more brisk, all economic entities, from individual investors to institutional investors, stand to gain. It is especially meaningful that the capital market is coping with the economic crisis and picking up in time for the enforcement of the Capital Market Consolidation Act in February.

The Capital Market Consolidation Act was enacted to nurture a more globalized capital market and financial investment sector by drastically relaxing the regulations on capital market entry and financial products while reinforcing protection on investors at the same time. With the two wheels of legal grounds and market recovery in gear, the Korean capital market now has an environment to support epoch-making development.

However, there is something we must not take for granted. The Capital Market Consolidation Act only provides a basic architectural structure for the vast stadium known as the capital market. Each financial investment firm will compete in the field by scouting talented players and establishing effective systems for operating. Just as building a world-class stadium does not guarantee all-star players, the enactment of the Capital Market Consolidation Act does not produce advanced investment banks all of a sudden. With the enforcement of the Capital Market Consolidation Act, each financial firm needs to make efforts to recruit talented bankers and sharpen their competitive edge.

Lately, however, major securities firms are holding off efforts to reinvent themselves as investment banks and are showing signs of competing for brokerage fees as their executives are replaced and the stock market rebounds. If the securities firms enter into excessive competition for brokerage, there is no guarantee that they will not repeat the painful precedence of so many financial companies that collapsed in the late 1990s from excessive competition.

The securities companies need to use the speedy recovery from the global financial crisis as an opportunity for a more fundamental change, rather than wasting it with brokerage fee competition. They need to reinforce the workforce and overhaul the system in order to be reborn as advanced investment banks. The most urgent task is to scout competent bankers who can handle various IB operations such as consulting for mergers and acquisitions, direct investment and IPO consulting.

Moreover, they need to establish a more advanced internal system including risk management for financial derivative products, customer relations management and conflict of interest prevention. These require considerable investments of time and money, and therefore, they require complete support from major stakeholders and the financial holdings company executives as well as the will of the management of each company.

It is also important to pursue a more specialized strategy that fits the caliber of each securities company. Instead of every company aiming to become a comprehensive investment bank, each firm needs to find a niche market that it can tackle the best. In the international market, investment banking giants such as Goldman Sachs and Morgan Stanley coexist with more specialized companies such as Fidelity Investments, which focuses on asset management, and Greenhill, which is known for its mergers and acquisitions consulting.

A proper investment in asset management culture needs to take root in Korea. Think about the devastation of the individual investors when the fund yields plummeted last year.

The securities companies need to accept a mission of playing a proper guide for the investors. The asset management consultants and financial advisers should actively publicize the reinforced protection for the investors and help improve wealth through healthy long-term investments.

The Korean capital market can only survive if it changes. And now is the perfect time for a change in the development of the capital market.

*The writer, a former deputy minister of finance and economy, is a visiting researcher at the Korea Institute of Finance.

by Im Yeong-rok