All but one of six leading fund managers contacted by Corporate Adviser has refused to disclose how much of their research costs are paid for off balance sheet and therefore not included in AMC or TER figures, through broker commissions.
Artemis, Fidelity, Invesco Perpetual, M&G and Schroders have all refused to disclose how much they spend on research through broker commissions through their flagship funds, just weeks after the FSA reported poor practice in relation to broker commissions from asset managers.
Corporate Adviser asked the managers of seven of the biggest retail funds in the UK – Artemis Income, Fidelity Special Situations, Invesco Perpetual Income and High Income, M&G Recovery, Schroder UK Alpha Plus and Standard Life Investments GARS – but only Standard Life Investments was prepared to disclose the extent to which it pays for research off-balance sheet through broker commissions.
SLI says around 2.6 basis points of the £13.2bn fund goes towards research paid for by broker out of commissions, meaning it spent around £3.42m on broker commissions. Standard’s GARS fund is likely to have a lower percentage spend on research because only 40 per cent of the fund operates through active buying and selling of shares.
Fund managers have two ways they can trade shares – on a pure execution-only basis or with research costs bundled into the trading cost. Where research is bundled in, the broker, typically a large investment bank, does not always give research to the fund manager. Instead it often holds it in a fund and at the end of the year pays it to the fund manager’s chosen research house.
Advisers have questioned why a fund manager wanting research would choose to pay for it in this way.
They have also questioned why research costs should be able to be taken off balance sheet by managers using these practices in a way that means these costs do not appear in the fund’s AMC or TER. Last summer Labour leader Ed Miliband’s entry into the charging debate highlighting the off balance sheet charges to pension scheme investors prompted the IMA, ABI and NAPF to create a joint industry code of conduct on disclosure. Disclosing amounts spent on research through broker commissions is not required by the new code.
In November an FSA report, Conflicts of interest between asset managers and their customers: identifying and mitigating the risks, found most fund managers did not exercise the same standards of control over research bought through commission paid to their brokers as they did when they paid for it themselves.
The regulator is concerned that while some fund managers do most of their research in house, others get theirs paid for through broker commissions, even though both funds might charge the same annual management charge.
Last month Liz Rae, senior adviser, investments and markets at the IMA told Corporate Adviser raised concerns over the downward manipulation of AMCs by fund managers when she said: “If managers were to pay for research out of their P&L then they would have to put up their clients’ fees. This would be a difficult negotiation to have with clients.
“The pension funds won’t allow the managers to raise their charges above a certain point. The pension fund knows they are paying for the research and the quid pro quo is that the fee is not high.”
The FSA Conduct of Business rules permit commission being applied to research costs.
But Ed Harvey, prudential risk analyst at the FSA says: “We have undertaken a thematic review of asset managers and the conflicts of interest in their businesses. Managing conflicts of interest is a fundamental aspect of running an asset manager. We had a look at what asset managers were doing and we were disappointed with what we saw.”
Some industry experts say a refusal to disclose research costs suggests fund managers have something to hide.
Andy Cheseldine, partner at LCP says: “Why would it be commercially sensitive to disclose these figures for research spending through broker commissions? It suggests that the fund managers that are not prepared to disclose these figures are collecting a lot more research in this way than their peers. Fair play to Standard Life Investments for coming clean on this.
“Why deal with a stockbroker that you pay extra so they can give you something back. In this era of transparency that makes no sense. And if any big fund manager suggests that it is commercially sensitive because it reflects the better deal they get because of their scale, then why not reflect that in lower fees? And why have this cost off balance sheet?”
A spokesman for the NAPF says: “The industry has made some good progress on charges transparency, including the publication of the industry-code to help employers when selecting a scheme for automatic enrolment, but there is still more to do.
Stephen Gay, director of life, savings and protection, ABI says:“Fund managers and asset managers do not choose to pay for research from commission to make an AMC lower than it otherwise would have been. The more the research costs the more performance is offset so there should be no incentive to over pay.
“The Joint Industry Code on disclosure covers the communication to employers of all charges and transaction costs in a manner that is clear and straightforward.”