If you have to buy your ideas, then you should foot the bill

John Kenchington

In the early days of my career, I once got chatting to an equity fund manager at a large Scottish fund house over drinks.

I asked whether she insists on meeting companies’ top managers before buying their shares, and I was taken aback when she said no – her decisions are all based entirely on broker research.

In my naivety, I’d assumed fund managers were acting solely on their own analysis. After all, factsheets never say anything about this broker research, and, considering the way they are promoted, it seems like every fund has its own cutting-edge global analysis.

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In reality, brokers call up fund managers and pester them with stock ‘ideas’ all the time. While some find this annoying, others couldn’t function without it. Most managers also use clients’ capital to pay brokers for research in one way or another.

Scandal has erupted once or twice over the murky system that facilitates these commissions. Sister title FTfm recently revealed that some funds are handing wads of client money to brokers in return for setting up meetings with chief executives.

But the regulator has now made it clear that change is coming, and the IMA – the trade body for fund managers – last week issued its riposte.

While chief executive Daniel Godfrey says the industry is open to “radical change”, the IMA’s document is really a treatise on the merits of the status quo, with a pledge to ramp up checks and balances and disclosure, which Mifid II will do partly anyway.

The report makes a weak ‘UK plc’ argument that managers would have to boost their annual management charges if they couldn’t take commissions out of client capital. However, it also says these commissions have a “low-cost impact on a per-client basis”, so surely such a move won’t add that much to each client’s annual charges?

We all know hundreds of funds simply do not perform well enough. I wonder how many of these simply rely on research – taking ideas available widely on the market and turning them into a consensus-driven fund format, charging clients for the privilege.

The point is, if there are managers who couldn’t operate without broker research, what are we paying them for? It’s the unique thinking, the opinion-forming process, that we buy into when we buy an active fund.

I understand if managers need to charge data vendor costs out of clients’ capital, and I know research can be useful for managers who cover global regions or the massive smaller companies universe. But if they want to pay brokers and research companies for analysis, or vanity CEO meetings, to improve their ability to compete, that is a cost of business they should pay for themselves.