It is one of the most paradoxical situations ever seen in the pensions/fund management arena.
On one side stands Paul Myners, chairman of Gartmore, one of the UK’s largest investment banks, pushing for fund managers to bear the cost of external broker research within a flat fee structure offered to institutional clients.
Criticised by his own firm for the proposals, outlined in his recent report on institutional investment for the government, Myners has been labelled by peers in the UK press as one of the most hated figures in the City of London for the hornets’ nest he has stirred up.
On the other side, amongst the piqued throng of investment managers and brokers, the UK National Association of Pension Funds (NAPF), has voiced serious concerns that Myners’ proposals for a transparent flat fee may be counterproductive for pension funds.
Truly, these are strange days. The arrival of AXA Investment Managers on the scene, endorsing Myners and announcing that it has entered into discussion with clients as how to best introduce commission free charges, will stir the pot further.
Fund managers may not like what is happening, but they will dislike their competitors getting the jump on them even more.
The debate over transparency of fees and so-called ‘soft commission’, whereby investment management firms can take broker research without any discernible value but pass the expense on to the client, is not a new one.
For Myners, the principle of good practice and governance is at stake, and despite the flak from peers in the investment management world he is sticking to his guns.
At a recent high-level forum in London, organised by the Centre for the Study of Financial Innovation (CSFI), a number of city pensions and investment experts argued the toss.
This was no quiet debate.
A number of respected fund managers and investment analysts began by dubbing the bulk of broker research a ‘disgrace’.
One investment banker claimed that the proliferation of wayward research was now so excessive that he could paper his walls with it.
Another added: “Most of it goes straight in the bin and it is enormously expensive.”
Much research, it was noted, was completely unresponsive to clients’ needs, unfocused and lacking independence.
“Imagine if you tried to explain to pension funds how research is rewarded in the City. People would find it extraordinary that this is the system we use,” concluded one speaker.
The point was clear; if fund managers had to pay for such advice then they would be more objective as to its independence and potential added value to the end customer.
Indeed Myners himself estimates that UK institutional clients pay around £2bn (e2.3bn) per annum to sell side research firms, before commission recapture is used to recoup some of the cost.
The argument against such practice would appear to be facile then.
A number of broker-research house directors at the CSFI round-table, who admitted profiting from soft commissions, conceded that such changes would hit their businesses in the short term.
However, even they concurred that once the system had changed methodology and firms were judged on the quality of their work, then income streams would be relatively unaffected.
Even consternation that Myners’ reforms could prove a disadvantage to UK fund managers was rebuffed by the counter argument that the UK could lead the way on this issue, with fund managers providing a breakdown of cost where clients could carve out the commission. Surely other countries would have to follow suit?
The NAPF for its part, while welcoming the bulk of the Myners report, has questioned whether the Gartmore chairman’s pursuit of transparency will actually achieve what it sets out to do.
The association says it is not against the proposals but is calling for independent research into the issue.
The pension fund lobby group argues that by including such commission costs in direct asset management fees, funds may actually suffer from poorer disclosure and be hit with higher overall costs.
Peter Thompson, chairman of the NAPF, believes that independent academic research should be conducted into the whole area of execution costs and is calling on the government to arrange such a study before it commits to the draft principle.
“ A set of principles which forced a significant minority of schemes to opt out of compliance because of higher cost and administrative burdens would devalue the code and be counter productive.”
The NAPF believes one of the fallouts of Myners’ proposals could be that pension fund investment is bracketed alongside that of mutual funds within fund management groups and may even come lower in the pecking order for executions.
The argument is that when the dust has settled pension funds will still be paying the same, if not higher costs, but that the buckets will have changed.
Paul Myners himself does not stress whether costs under his reform would be lower for pension funds, just that transparency and accountability would be vastly improved.
Understandably, views amongst the investment community are mixed.
Consultant William M Mercer, in its response to the Myners report, says it supports the initiative to include external research and broker services in managers’ fees.
Andrew Kirton, head of UK investment consulting, points out that at present trustees cannot readily identify the true total costs of management.
“Additionally, the bundling of research and trading costs within commission payments does little to discourage the provision of unnecessary research, to contain trading activity and otherwise to control costs.”
Mercer concedes that the issue will be something of a ‘bombshell’ in the city, but stresses that the suggestion should not be put on ice for being controversial.
“Undoubtedly there will be much resistance to this proposal in the city, and many will declare that the issue is too complex or too difficult to resolve.
“The potential benefits to schemes will be lost if this issue is put in the ‘too hard’ box.”
Mercer though has doubts: “While we are not entirely sure that Myners’ proposal will have the desired effect, we think that it should remain as it stands, and the investment community should be given every encouragement to pursue its underlying objectives.”
Fellow consultant Watson Wyatt takes a slightly softer line.
Nick Watts, head of European consulting at Watsons, comments: “Provisions to improve transparency of brokerage costs and reporting requirements seem better than the review’s proposal to charge research commissions to the manager. We believe the Myners code should include such a principle.”
The UK treasury is currently considering the Myners report, conscious that its conclusions will have huge ramifications for the investment industry, not just in the UK, but globally.
A report just commissioned by the UK Fund Managers’ Association will examine just how big the implications of such a change will be.
Its findings are set to make fascinating reading.

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