(February 18, 2014) — The UK’s Investment Management Association (IMA) has threatened “radical change” to how its members access the research that helps them make portfolio decisions.
The organisation representing investment managers said the market needed an overhaul, as the way its members accessed information on companies and the wider economy was rife with conflicts of interest.
Daniel Godfrey, chief executive of the IMA, said for many firms, research was essential to help portfolio managers “deliver returns for the benefit of clients”. But, he said a new business model was needed that would “ensure value for money, transparency, and accountability”.
“There are clearly challenges and conflicts inherent in the current business model and the IMA is open to radical change,” Godfrey said. “But there are also advantages and we should make sure that we are not inadvertently losing something valuable by changing the model without a thorough assessment of all the factors.”
The main providers of research to fund managers are investment banks, which often provide the trading facilities through which managers buy and sell securities.
A report from the IMA outlined its main issues on this scenario: “The report pays significant attention to payment for research by means of dealing commission, bundled with execution costs, and paid out of client funds, which is the most common approach; and which can give rise to conflicts of interest.”
The fund houses often end up paying the most fees through this system and, due to financial regulations, do not receive a superior service to smaller investment managers. The cost is usually taken from the return to the end client, which, the IMA said, is unfair.
However, by changing aspects of the current market, the IMA admitted that coverage of some smaller listed companies may be abandoned if there was not enough demand—or reward—for carrying it out. Also, Godfrey warned that an international approach would be needed “to avoid both arbitrage and damage to the UK’s competitive position”.
The IMA has requested the cooperation of the UK regulator, the Financial Conduct Authority, to help create a sustainable and fair system.
The main eight measures the IMA considered to make a “good regime for research payments” are:
Clients
The regime should operate in the best interests of the clients of investment managers. This is particularly important because those clients depend upon investment outcomes for their prosperity and security. They are also the key suppliers of capital to industry.
Investment managers, as agents of the clients for whose ultimate benefit the research services are procured, should behave demonstrably as the guardians of their clients’ best interests within that regime, including conflict management and the provision of value for money.
Any cost borne by a client should reflect an investment manager’s honest, fair, and professional assessment that it is in the interest of that client to bear that cost.
Investment managers should disclose to their clients in a timely and meaningful fashion any costs or fees relating to the consumption of research borne by them or their investments.
Market
The research market should operate efficiently and transparently, so that investment managers can negotiate the best value for the research consumed for the benefit of their clients.
The market structure should ensure that a wide range of investment managers have access to a broad spectrum of competing research providers and service offerings and does not raise barriers to entry.
Research providers should not discriminate in their supply according to the use of other services, including execution and allocation.
The UK’s regime for paying for research should not undermine the UK’s international competitiveness as a leading jurisdiction for asset management and other activities associated with financial services.
Download the full report here.
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