Broker Vote Poised For Change


The following is a guest article from Caspar Luard, who heads sales and marketing for MeetMax and EasyBrokerVote.

I provide these comments as a long-time observer of the broker voting process. I have been both an institutional sales/marketer for a bulge bracket equities business and now I am a provider of corporate access productivity software (MeetMax) and broker vote software (EasyBrokerVote).  From my perspective, the broker vote process holds promise for more transparency.  For broker vote to evolve, however, there needs to be additional impetus for change.

The Current Standoff

The commercial relationship between buy and sell side is remarkable for a long time standoff in which both sides hold out hope that the other would provide transparency.

Asset managers would like the sell side to price research and the sell side would like the buy side to place a value on sell side research. This standoff has meant that there has been a very slow move towards any transparency in the prices paid for different sets of sell side services.

The Sell Side Perspective

There are certainly benefits of a transparent broker vote to the sell side:

  1. Sell side firms can use broker votes to understand which of their employees are providing most value to the buy side.
  2. Sell side firms can focus over all resources and investment on categories and sub categories that the buy side values. The increased importance of corporate access teams is a reflection of buy side feedback.
  3. Sell side firms can better segment their service to provide different services to different asset managers. A broker vote from an asset manager provides a clear pathway to more revenue.

However sell side firms may also see benefit in bundling different services together to maximize revenue. The sell side often strives to obtain as much of a client’s commission budget as possible.

Broker votes can provide a quantitative weighting to a particular service but the commercial outcome is likely to be influenced by the size of the commission spend in the relevant time period. A transparent broker vote may therefore not always be helpful to this specific revenue maximization strategy.

Some academic work supports the argument that improvement in a broker vote process by a broker leads to more commissions for that broker. David Maber, Assistant Professor of Accounting at the University of Michigan’s Ross School of Business published ” The Use of Broker Votes to Reward Brokerage Firms’ and Their Analysts’ Research Activities” in July 2014. The report argued that if a broker provides asset managers with better services as detailed in a broker vote, commissions do seem to rise.

The  Buy Side Perspective

For the buy side the justification for detailed disclosure is not that urgent. However there is a powerful case that smaller funds who run a vote may punch above their commission weight in terms of receiving service. A panel at the Broker Vote Summit in NYC in 2014 discussed this specific point. A panelist, who worked for a mid-sized asset manager argued that by providing a detailed broker vote they felt that they were able to receive better service than comparable sized funds without a broker vote.

Nevertheless, it is likely that many portfolio managers feel that completing a broker vote is more painful than completing taxes and is less rewarding. For many asset managers, the broker vote is not as effective as it could be because those who vote see the process as a chore with no direct benefit.  What is needed is a catalyst to make voting more rewarding to asset managers and their staff.

Breaking the Deadlock

There are certainly multiple factors that should result in more transparency for both sides of the broker vote standoff:

  1. Increasing regulatory and compliance issues outside the US provide pressures for increased transparency. Initiatives on MIFID reform in Europe are an illustration.
  2. Limited growth opportunities for equity trading commissions (the main payment mechanism for sell side services).
  3. SEC rules that govern what services fund assets can be used to finance. Section 28(e) of the Securities Exchange Act of 1934 specifically covers the purchase of “brokerage and research services”. Subsequent interpretations reinforce the responsibility of asset managers to ensure that the amount of the commission was reasonable in relation to the value of the brokerage and research services received. A broker vote process would address this requirement.
  4. Asset managers use increasingly diverse sources of providers for input into their research process. These providers may not have the ability to execute trades for commissions and therefore will be reliant on asset manager processes such as a broker vote to evaluate and pay for their services..

Logic continues to suggest that there is a directional trend towards more broker vote transparency but the immediate impetus for an acceleration in this trend is less clear.


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