Some Asian asset managers have been reviewing the way they pay brokers after a directive from the UK's Financial Services Authority late last year banned explicit payment for corporate access.
The move affects Asian asset managers with operations in the UK or with a high number of UK-based clients – they must now align their commission payment practices in Asia. Several of these firms tell AsianInvestor they are looking at how to respond.
And while the letter sent by the regulator to asset managers last November has no direct extra-territorial impact on offshore institutions, many buy-side firms this summer began hastily researching the possible implications of such a clampdown on their Asia-based operations.
Asset managers – most notably hedge fund firms – using client commissions to pay brokers to secure private meetings with investee company executives is seen as controversial, both due to potential misuse of the fund client's money, but also issues over unequal access to information.
Yet portfolio managers view the research/advisory and corporate access provided by brokers as a major factor when conducting broker reviews.
Ultimately, the FSA’s letter has prompted the industry to evaluate how brokers should be compensated for all the services they provide. Research is one aspect, and as one senior trader at an Asian fund manager notes, is not an easy one to answer.
“At the moment, we are having a misalignment [on how buy-side investors] should value the research and corporate access service they are getting from their brokers," he says. "Brokers are being asked to put a price on research – it’s been quite difficult for them to do."
Sarah Roy, a senior manager at Eastspring Investments in Singapore, says since the FSA first announced these initiatives, her firm’s Singapore branch has been revising its internal broker-review process, performed twice annually.
The firm’s eventual aim is to do away with paying brokers separately for corporate access, she says. “Going forward there will be no separate payment for such services. The focus will remain on quality, and not quantity of meetings."
Other investment managers are considering incorporating corporate access payments as part of their research bill.
Broker-dealers have always competed to be full-service brokers to their clients, so they not only earn commission for their trading services and helping the buy-side find liquidity, but also get paid for research and trade ideas.
This won’t be an easy approach, some argue. For example, it may be difficult to prove to regulators there is a pure research element to meetings arranged by brokers for corporate and investment manager clients.
“Perhaps we should arrange meetings ourselves,” the senior trader says. The trouble with just relying on their own prowess for meetings is that brokers have “networks and relationships with some corporates that we do not”.
Some even think the arrangement of private meetings between investors and corporates for a fee will eventually become obsolete in Asia. One such executive is Stephane Loiseau, Société Générale’s Asia-Pacific head of cash equities.
Participants instead will rely on investor conferences organised by broker dealers, where a company can meet 20 buy-side investment managers in one day, he argues. “With conferences, there will be more transparency than pre-arranged, private meetings,” Loiseau says. “There will be verifiable audit trail of the event and what meetings were involved during the conference.”
Broker-dealer analysts will also get involved, and, as such, the meetings will be advisory in nature, he adds. “[This] is at the core of what investment managers are looking for from their broker/ dealers.”
According to Greenwich Associates’ annual survey on equity commission trends, for the 12-month period ending September 2012, the average cash equity commission paid by Asian investors (excluding Japan) totalled $9.4 million, a 13% decline from $10.7 million the same prior year-ago period. Greenwich Associates had not finalised their survey for the 2012-2013 period.