Research by investment management consultancy firm Investit indicates that the new regulation requiring the unbundling and reporting of commission spent by the buy side on execution and research is putting pressure on fund managers to justify the sell-side research they are using.
As of January this year (following the publication of PS05/9 by UK regulator the Financial Services Authority), fund managers in the UK have to make known to clients what is being spent out of those clients’ commission on research and execution. In the US, the SEC is known to be considering a similar approach. “If managers have been reliant on broker research bought with client commission, they will need to be able to demonstrate the value of that research,” says Richard Phillipson, principal at Investit. “And if fund managers need to quantify the value of research, it is likely that there will be rating systems springing up that can help judge research objectively. At the moment, managers tend to divide commission among brokers by a voting system that they will find hard to explain.”
Pressure on brokers
Phillipson believes that now research costs are to be displayed separately there will be pricing pressure on the brokers providing research, and fund managers will be more selective.
