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Fund managers face £3bn hit if sell-side research is banned
by David Campbell on Oct 28, 2013 at 10:59
Asset managers could face a $5 billion (£3.08 billion) hit or approximately 50% of active equity profit margins if regulators press ahead with proposals to ban them from using sell-side research.
The suggestion is one of a series being considered by regulators and industry bodies on both sides of the Atlantic as they consider potential conflict of interest concerns over how research is paid for.
The figure was arrived at in research by Frost Consulting, which advises on equity commission unbundling, and Quark a provider of financial publishing software.
While an outright ban is unlikely, the research noted that some rebalancing of the cost sharing on equity research from sell to buy side and greater controls on how costs were met is probable.
‘Asset managers are under pressure to provide greater transparency and accountability in terms of how they pay for the equity research they receive,’ said Frost principal Neil Scarth.
‘The old model of having the research paid for in part by commissions is being eroded and it they were forced to cover the whole cost of the research they use it would have very significant impact on their operating margins and profitability.’
UK regulators wrote to asset management chief executives raising their concerns about how client money was spent on research via broker commission payments and flagged worries about weak internal controls.
The Investment Management Association is producing its own response to the issue which will be published early next month.
‘Frost Consulting, basing its research on available information on publicly-listed international asset managers, estimates that the operating margins for their active equity businesses would almost halve from around 23.5% to 12.5%,’ said the report.
‘Active equities can vary from 20% to 100% of an asset manager’s business depending upon the breadth of their multi-asset class offerings (or lack thereof).’
The company noted the widespread adoption of commission sharing agreements, (now used by 90% of large asset managers in the UK, 80% in the US and 60% in continental Europe), allowing managers to split commission paid for brokerage from that paid for research, had weakened ties.
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