Paying for research
March 24 2015
Glenn Bedwin (Absolute Strategy Research)
Richard Taylor (Jefferies International)
Guy Sears (Investment Association)
Alistair Haig (University of Edinburgh)
It is 14 years since Paul Myners, in his review of institutional investment, said it was “an unacceptable market distortion” for fund managers to direct business to brokers, typically at investment banks, based on ancillary services rather than best execution of trades". In 2006, new rules went part way to unbundling payments for research from trading fees, but those ancillary services still niggled – especially when it turned out that corporate access was being classed as research. Now both ESMA, the EU market authority, and the FCA are trying to finish the “unbundling" job.
ESMA calls the provision of research an “inducement”; the FCA is concerned that about half the £3bn paid annually by fund managers’ clients in dealing commissions is accounted for by research payments. Another cause for concern is that the market for research is opaque. Investment banks still dispense some of it “free” while independent research providers clearly cannot operate on that basis. The 2006 solution, commission-sharing, is seen by some as proper acknowledgement of the value of research and by others as a hit-and-miss arrangement that fails to price the service properly.
It’s a sensitive subject. Sell-side research is too easily criticised as “me too” offerings when it often does add value to whatever the fund manager is doing in-house. Commission sharing has ensured that some of the redirected fees go to the independent sector, which has now established itself. Redirecting some commission income to pay for research into smaller companies at least makes sure it gets done. The alternative may be worse: the companies themselves paying for the research.
We are delighted to have representatives of the buy-side, sell-side and independent sector to help us debate the issues.
- Guy Sears is director for risk, compliance and legal at the Investment Association, trade association of the UK's fund management industry. He leads the policy teams covering the regulation of funds and managers, and their engagement in capital markets.
- Richard Taylor is head of EMEA equity research at Jefferies. He has spent 25 years working in sales and research leadership roles, including 13 years at Schroders and Citigroup before joining Jefferies in 2010.
- Glenn Bedwin is the chief operating officer at Absolute Strategy Research and a board member of Euro IRP. He previously focused on the investment research market in senior roles at Thomson Financial and at Fidelity International.
- Alistair Haig is an Early Career Fellow in Finance at the University of Edinburgh Business School, having jumped ship to academia following a 15 year career working in quantitative investment research for buy-side and sell-side firms in Australia and the UK. He is currently researching fund manager decision-making when buying or undertaking investment research.