The importance of sell-side research and trade ideas will move ahead of execution for US buy-side firms in 2010 as they try to rebuild the confidence and trust of their retail investor clients, according to a new study from research and consulting firm TABB Group.
According to the study, ‘US Institutional Equity Brokerage 2010: Assets, Commission Management and Concentration’, which examines the services buy-side firms need from their brokers, the number-one goal for asset managers this year is to improve their performance and rebuild assets under management following the difficult past two years.
Thirty-seven percent of the 66 head traders interviewed for the study cited performance relative to their peers as a driver of growth of their firm in 2010, while absolute performance and return of retail investor confidence were mentioned by 26% of traders.
“The buy-side has gone through a tremendous loss of assets. They have watched their performance track records devastated and a flight from risk on the part of the US investor, so there really is no other driver or priority that is more important than re-establishing that track record,” said Laurie Berke, principal at TABB and author of the study, in a presentation of the findings.
As a result, the innovation and development in execution will take a backseat to research and other non-execution services in 2010. “Execution was king for the last few years. It drove the relationship between the sell and buy-side, fragmentation, dark liquidity – all those things that are front of mind,” said Berke. “That revolution is probably over. The buy-side has a full complement of capabilities and a tremendous amount of experience in using that. So for now the focus is bringing the investor back.”
She adds, “For the trading desk this probably means less discretionary flow and the focus on saving 10, 20 or 30 basis points in execution costs is not as strong as on making sure the portfolio managers and analysts get the content and the coverage that they need.”
In particular, the buy-side will be keen to tap into the flow of initial public offerings, which is expected to pick up after the recent slump. “When the investment banking calendar comes back, it is so important for the buy-side to have access to company management and share issuance. That will be a far more significant driver than it has been in the past couple of years.”
The need to pay for research will also drive greater use of commission sharing agreements (CSAs) to pay for execution and research separately. Some 65% of respondents to TABB’s study said they used CSAs in 2009, up from 40% in 2007. “The expectation going forward is that there will be a continued growth in the use of CSAs,” said Berke. “The need to pay for content is one of the drivers of the increase in percentage of the gross commission pool flowing through CSAs.”
Equally, the amount of commission that remains with the broker administering the CSAs – typically the executing broker – will dwindle as more commission dollars are directed towards research. “Forty-nine percent of respondents say that the percentage of commissions they pay to the CSA broker will go down in the next two years,” said Berke.