Monthly Archives: January 2013

Trans-Atlantic interest in broker research model on the rise

Source: 22 Jan, 2013

Michael Glenister

Interest in broker commission payments spreads to US as critics continue to voice concern about state of the research and corporate access industry

Interest in potential problems with the system for corporate access payments is growing in the Unites States, according to the author of a report on the subject. which triggered widespread interest from national media and the Financial Services Authority (FSA) in the UK last year.

“Interest in the issue of corporate access payments is beginning to surface on the other side of the Atlantic after the topic received significant interest here in 2012,” Vince Heaney told this publication.

Heaney authored Independent Research: because they’re worth it?, a report for the Centre for the Study of Financial Innovation issued last year. Work from the CSFI has recently attracted national interest and added to regulatory pressure on broker research and corporate access payments.

The FSA last year issued a report into conflicts of interest at asset management firms, commenting that numerous managers were failing to adequately control broker commissions paid for with client money.

Those commissions are often seen as payment for a bundle of services, including corporate access to the boards of investee companies.

That practice was criticised by the landmark Myners report released in the UK in 2001, which noted that the bundling allowed managers to pay for a variety of services with client money, without disclosing all the fees they were attracting.

Extel, a Reuters organisation, recently estimated that corporate access payments account for around 25% of commission fees, up from 15% in the last three to four years.

Some commentators have more recently commented on other potential flaws inherent in the existing model for broker research and corporate access.

One example of a criticism voiced to this publication is that the practice of investment bank analysts providing research to clients while also providing that information to proprietary trading desks is widespread.

“Analysts at large firms will release research to clients but are conflicted because they also provide the releases to their own desks, often doing so in advance to allow the bank to get an edge over clients,” commented one source who preferred not to be named.

A handful of large financial institutions were fined by the US SEC (Securities Exchange Commission) in 2012 for forging partnerships which allowed market data and analysis either to be seen by internal trading desks before clients, or offered to specific clients before others in order to give them a competitive advantage.

According to Heaney’s report, research providers at sell-side banks are likely to come under increasing pressure in future years as their revenues are restricted.

His report notes that declining trading volumes in the equities markets are making the business of providing research less appealing to sell-side banks.

Heaney added that change provided an opportunity for independent research providers (IRPs) provided they can demonstrably deliver value. “Sell-side contraction does not imply an easier ride for IRPs,” he said, adding to evidence in his report which indicates that asset managers are increasingly seeking to measure the added value gained from trade ideas which come from IRP advice.

The CSFI survey of asset managers found that almost half (47%) of asset management firms currently pay for independent research, while 87% expect the independent research sector to gain market share next year.