Benchmarking Research Spending


As the UK’s Financial Conduct Authority (FCA) has increased scrutiny of commission spending on research, a UK-based consultancy has begun benchmarking commission spending to provide greater transparency on research pricing.  The survey is a sign that asset managers are trying to gain more control over their research spending.

Investit’s survey

Investit, a UK based consultancy for the buy-side, recently completed a Commission Analysis Survey designed to benchmark participants’ commission spending relative to peers.  The initial survey was conducted from May to November last year and included 20 asset managers.  The survey gathered information on approximately £800 million (US$ 1.3 billion) in commission spending for 2012.  The survey looked at trends from 2010 through to mid 2013. Approximately half (£400 million/US$ 655 million) of the commission spend was attributable to research.

The survey included multiple choice questions on governance practices, questions on commission budgets, and asked for detail on commission spending. Investit plans to update the survey with 2013 data and 2014 predictions in the coming weeks.  It expects to have 20 asset manager participants by year end.

Participants are primarily UK-based managers and do not include hedge funds at this time. Only a few US-owned managers participated.  Richard Phillipson, who heads the survey for Investit, doubts that the US firms’ hesitation reflects better controls: “Perhaps these firms do believe their commission-for-research governance is already in line with the criteria set out by the FCA.”

Integrity Research partnered with Investit in 2007 to offer a similar commission survey, but both parties abandoned the effort because of tepid asset manager interest at the time.  Investit revived the idea last year after UK regulators raised questions about how well asset managers govern their use of client commissions.  Results of Investit’s commission survey are confidential to each participant, but some participants have told the FCA that they have been a part of the project group, in an effort to demonstrate commitment to improving governance of commission spending.

Increased focus on research spending

Richard Phillipson sees evidence that UK pension funds are beginning to pay attention to commission spending by the asset managers they utilize.  Local authorities (municipal pension funds), county councils and sovereign wealth funds seem increasingly attuned to the issue.

Investit believes that the trend is for asset managers to negotiate research budgets on a sector basis as well as for country coverage.  Representative spending by sector might range from £30 to £50 million (US$ 50 to 80 million).  Going forward some asset managers will seek to cap spending by limiting the sector or country-level information received from each broker dealer.

The most surprising aspect of the commission survey for Phillipson was the expectation among participants that commission spending on research will be phased out over the course of the next few years. A small majority of participants think that the ability to spend client commission on research may be over in five years.


Investit’s ability to launch the benchmarking survey reflects heightened concern by asset managers to better manage their research spending.  Since significant cooperation is required from the benchmarking participants, it is no easy task to get such a survey off the ground, as we know from direct experience.   Participation in the survey will be a bellwether for asset managers’ receptivity to the FCA’s desire for improved governance of research commissions.

The lack of participation by US-owned firms reflects one of the challenges faced by the FCA: how universal would a no-research commission regime become?  While MiFID II might extend a ban on research commission payments to continental Europe, the reality is that most competition for UK asset managers does not come from Europe.

There is precedent for UK-led commission reform to become broadly accepted.  After the predecessor to the FCA implemented a more transparent commission regime in 2006, global asset managers began utilizing commission sharing arrangements (CSAs) to provide more transparency on the research portion of commission spending.   CSAs have become broadly used in multiple domiciles including the US, especially as asset managers have struggled to keep research providers happy during a declining commission environment.

However, CSAs required minimal support from other regulators.  The US Securities and Exchange Commission (SEC) issued a couple of no-action letters supporting CSAs, but otherwise did little to encourage a more transparent commission regime despite public promises by SEC commissioners to do so.  In contrast, a US ban on research commissions would require an act of Congress.

Paradoxically, despite the fact that the majority of participants in Investit’s survey believe that the ability to use client commissions to pay for research will go away, Investit’s success in launching a benchmarking survey actually makes it easier for the FCA to back away from an outright ban.  The survey provides a concrete sign that the UK asset management industry is heeding the FCA’s warnings without having to go the full measure.  The trick will be whether asset managers continue to benchmark even if the FCA were to move on to greener regulatory pastures.


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