Corporate Access: Should Investors Really be Paying for It?
Since 2006 the U.K.’s Financial Services Authority (FSA) has limited investment managers’ use of dealing commissions to the purchase of trade execution and research services. More than six years later it would appear that not everybody has been abiding by these rules; the FSA is shining a spotlight on the opacity surrounding who pays whom, and what they are being paid for, in the non-transparent world of corporate access.
Under FSA rules, asset managers and investment banks can charge for the cost of making a deal and for research but not for setting up face-to-face meetings. The FSA probe into research costs is part of a broader investigation into how asset managers look after their clients’ money. On 9 November 2012, the FSA published the Dear CEO letter and report Conflicts of interest between asset managers and their customers: Identifying and mitigating the risks. This letter follows the FSA’s reviews of asset management firms carried out from June 2011 to February 2012 focusing on assessing firms’ arrangements for managing conflicts of interest. These reviews were prompted by evidence that some firms no longer saw conflicts of interest as a key source of potential detriment to their customers and that they had in fact relaxed controls that were considered to be well-established market norms. The report suggested that conflicts were widespread, with asset managers failing to meet requirements on disclosing commission payments, as well as using customers’ money to purchase research and execution services without checking that they were eligible to be paid for in that manner. The FSA also wrote that in some cases buy-side firms were unable to demonstrate how corporate access constituted research or execution services.
Corporate access has been a growing trend as analysts and fund managers become more pressured to find an informational advantage, and they seek better and deeper knowledge for their research, as well as seek to engage and further improve fund and issuer performances. Although the figures appear high, the 2012 Thomson Reuters Extel Survey shows that the proportion of dealing commissions used to pay for corporate access is on an increasing trend rising to 29% in 2012 (from 27% in 2011 and 21% in 2010). As an ex-market participant, I find these corporate access figures hard to believe. It would not be a stretch to assume that these figures are likely to be inflated given that corporate access is a bundled service and does not exist as a single reporting line item in any fund management or brokerage firm.
So change to the business model is more than likely. Concierge-style broker services will become more difficult to charge for, and commissions allocated to corporate access are likely to dramatically decline. Transparency will have to improve. Nonetheless, the opportunity to revisit this topic should be welcomed as we continue to ask why fund managers are being charged for this access to company management in the first place. It would be unusual for large funds to struggle getting face time with management — sadly the same cannot be said for the smaller players. Whilst the FSA is in listening mode, maybe they could read the CFA Institute guidance for ethical practices involving client brokerage. It may just be helpful.
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