More than $22bn was raised by asset managers in 2011 to spend on research costs and corporate access by opting for bundled trading rather than execution-only dealing, an Investment Management Association debate heard today.
Frost Consulting principal Neil Scarth told delegates at the event in London that in around $6.6bn of this sum was used to pay for research, half of which went to third party research providers.
Scarth said asset managers who continued to opt for bundled trading were putting themselves at a competitive disadvantage because the pool of research they were accessing was shrinking in size, and because unbundled providers who took research from a variety of sources had greater options for seeking out alpha.
His firm estimated that 33 per cent of bundled commission charges go on execution costs, with the balance being diverted to commission sharing arrangements (CSAs), some of which ended up paying for corporate access or research.
IMA director, institutional Guy Sears said the row over using broker commissions to gain corporate access is a side-show with the real issue facing the asset management community the controls over how soft commission cash is spent. He said the industry needed to make sure oversight of expenditure of research funds was as rigorous as that for money spent out of the asset manager’s own profit and loss account. But some delegates pointed out that the UK is already more transparent on broker commissions than other jurisdictions and going for further transparency could put the nation’s asset management industry at a competitive disadvantage.
Speakers also expressed concern at the potential for some clients being treated more favourably than other clients when payments under CSAs, which by necessity involve some level of cross-subsidy, were determined.
Scarth said: “We see asset managers like CSAs. We think they will represent 40 per cent of trades in the US and Europe. So the ability to retroactively redistribute commissions is a great luxury to have. Investment banks have had a well-documented tough time in recent years. We think the average aggregate research spend by investment banks has declined by 40 per cent on a five year view.
“This also has significant implications – for asset owners in terms of value for money and for asset managers, because those that do not unbundle are at a competitive advantage. They can only buy research from a universe that is in decline whereas their competitors are free to avail themselves of the almost unlimited unbundled content universe.
“So the key is how do we reinvest information procurement. We have 35 years of muscle memory here and so that move must come from the top.”
Sears said: “Many people now think that the corporate access issue was that important early wake-up call but in the bigger picture is a distraction, with the wider issue being over controls and the whole pricing structure of the market. Any firms asking themselves now that if the controls they have in place for spending, say £10m, if it goes through P&L then it goes through one side of the business through prior year budgets, through the year through budgetary control, MI, finance director oversight, but on the other side of the business goes through a CIO, what is firm doing to show the controls in place are adequate to be accountable for the spend.
“The concern around is that the gatekeepers themselves have unaligned interests.
Universities Superannuation Scheme co-head of responsible investment David Russell said: “We decided several years ago to adopt an unbundled approach. This involved setting up a separate fund to pay for research. It has saved us considerable sums of money.”