New York-London is booming, with real estate prices, the pound and Prince William all going strong. In our recent visit there, we looked to developments in London’s research area, to see if it is a bellwether for research trends headed to the U.S. Today we conclude our two-part review with an examination of broker relations, the broker vote and research pricing.
A New Role
Headhunters, take note. There is a new role which is now common with asset managers in London: Broker Relations. As the name implies, the position is responsible for managing the relationships with brokers, administering the broker vote and helping to manage the various CSAs.
Different firms take different approaches to the job. In some cases, the position is a part-time position headed by an existing portfolio manager or analyst. With the larger firms, it is increasingly a full-time position, often reporting to the Director of Research.
The position may also serve as an internal resource to help portfolio managers and analysts find alternative research, industry experts, or market research firms, and to serve as a filter to help shield analysts and PMs from sales calls from alternative research firms. We are starting to see this role in the U.S. also.
The Vote Is In
The broker vote also seems well established in London, although approaches and timing varies widely. It appears that semi-annual voting is the most common approach, with a number of annual votes and a diligent few which administer quarterly votes.
Typically the vote is assigned to portfolio managers and analysts based on trading volume or assets under managements. The vote reflects the asset managers organization. If the asset manager is organized by geography, the vote will have a geographic dimension-a portion allocated to UK research, a portion to European, Asian and so on. Some assign a value, say £10,000, to each vote.
Wheat & Chaff
We heard a number of firms comment that it is a big help to have defined amounts assigned to their various teams. It increases accountability, and begins to create a ‘budgeting’ process for research, sensitizing the research users to the research they are receiving and what is most valuable to them.
Everyone stresses that the goal is not to cut costs, but rather to make sure they are getting the research services they find most valuable. In the old firehose method of research distribution, when all research was ‘free’, there was a very limited ability for the buy-side to tell the sell-side what was valuable. Now the buy-side can get more specific about the aspects which are most useful.
Generally access to analysts is rated highly, as is the sales support. We heard a few firms say that access to management was useful, but something they could do themselves. Nevertheless, when FSA originally proposed omitted management access from research services which could be softed, there was such a hue and cry from asset managers that the FSA put it back in. Even for the largest portfolio managers it is hard to get access to company management in some countries like Greece.
Name That Price
The big frustration in London is with research pricing. Asset managers have bi-lateral discussions with each broker revolving around the level of research spending. These discussions often get involved, with the asset managers discussing their votes and the amount of commissions they propose to allocate and brokers detailing the services they have provided and how inadequate the spending is.
Asset managers feel it would be much more straightforward if there were explicit pricing for research services. With a few exceptions, the sell side is reluctant to provide a ‘rate card’. They will discuss minimum levels or “threshold” commitments for a certain level of service. This hasn’t satisfied the buy side, and they are trying other approaches to pricing the research.
One approach is to use alternative research, which usually has explicit pricing, as a proxy. This is imperfect, since most alternative research does not offer the level of support that sell side institutional sales professionals offer. Some asset managers are using a consulting model to price research-x hours of analyst access times y cost per hour. Others are using their own internal costs as a proxy.
It is not yet clear what the resolution to this impasse is, but we’ll be keeping an eye on London to see what transpires.