After sharply cutting back last year on their use of commission payments for third-party research products or so-called “soft dollar” allocations, instititutional investors are starting to return to business as usual when it comes to paying third-party brokers for research and other services, according to new research from Greenwich Associates.
For several years, uncertainty about how regulators will ultimately rule on the issue of soft-dollar arrangements has prompted US institutions to adopt a conservative stance in their use of client commissions to pay for third-party broker research and services. Due in large part to this uncertainty, industry-wide soft dollar totals dropped 25% to $725 million in the 12-month period ending in February 2007 from $970 million the previous year, according to the results of Greenwich Associates" 2007 US Equity Investors Study.
As recently as 2004, more than 80% of institutions used soft dollars but by 2007 that proportion had fallen to 62%, says the study. In keeping with the general decline in usage, commissions directed for third-party products and services have dwindled as a proportion of overall US equity commission payments, which totalled some $10.3 billion in the year ending February 2007. Payments for third-party research products and services represented 9% of total commission payments in 2005 and 2006, but only 7% this year, according to Greenwich Associates.
The research reveals a sharp turn in sentiment. When asked to project their intended third-party products/services budgets for the coming year, institutions predict a market-wide bounce back to 10% of total commissions. Investment managers predict that third-party allocations will jump to 13% in 2008, and banks expect to increase allocations slightly from the current 20%.
The research uncovers another sign that institutions are becoming more comfortable with the regulatory environment: roughly 30% have set up client commission-sharing arrangements with brokers, and 60% say they will have one in place within the next 12 months. "Two-thirds of the market's largest institutions and most active traders expect to have a commission sharing arrangement (CSA) in place by year-end 2007," says Greenwich Associates consultant John Colon.