Financial publisher Clear Path Analysis has launched a report, sponsored by agency broker Instinet, on the value of independent brokers and research houses. Entitled ”The role of independent research & brokerage', the report covers the attitudes of institutional investors towards unbundling of commission and the separation of service offerings across execution and research. It broadly finds that while increased cost transparency is desirable, independent research firms are still struggling to compete with the bulge-bracket banks.
“On a very simplistic level, having the freedom to write cheques for research means the amount you pay is not linked to the volume of shares you trade,” says Elizabeth Fernando, deputy chief investment officer for the Universities Superannuation Scheme, the UK-based final salary pension fund for employees in higher education. More specifically she says that for sectors that are rarely traded, bundled payments present a challenge because analysts are not rewarded for coverage much of the time, which can lead to unnecessary transactions being carried out to support research in the sector.
Because her firm pays for research and execution separately, “We can also now direct our trading volume towards houses that have achieved the best executions for us. This has resulted in better prices, lower trading errors and lower fees all of which again benefits our clients,” says Fernando.
Bruce Weber, professor of information management, London Business School says that buy-side firms need to improve their cost transparency
“You would like to see fund managers ensuring that they do get low transaction costs when they trade, not paying wide bid-offer spreads and to have the sources of their insights and data explicitly managed so they can be assessed against value provided. I don't see many of the buy-side institutions having that level of governance and oversight.”
But despite the value to the buy-side, the economic crisis is limiting the ability of firms with narrow offerings to compete with the bigger, broader players. “Many of the independent research services are still struggling to find the right model and the way of charging for these services, particularly as liquidity drains out of the market,” said Colin McLean, founder and managing director for buy-side firm SVM Asset Management. Fee payment often has to be made in hard cash, he says, and the pressures are still on investment firms to limit the fee-paying services they can take on.