Fund Managers May Face Multibillion-Dollar Research Costs

Fund Managers May Face Multibillion-Dollar Research Costs

Asset managers may no longer be able to pass on the multibillion-dollar costs to clients of the research they buy from investment banks, the chief executive officer of the U.K. markets regulator said. The Financial Conduct Authority is considering forcing global fund managers to pay for research instead of charging customers through trading commissions, Chief Executive Officer Martin Wheatley said in a speech today in London. Investment banks spent $5 billion last year on equity research used by asset managers, according to a report by Frost Consulting & Advisory and Quark Software Inc.The research is included in trading commissions paid to investment banks by fund managers, with the cost passed on to the customer. The regulator wrote to asset managers this year to say they were failing to control costs and need to regularly review whether services were eligible to be paid for using commissions.

“Of most concern is that firms are pushing the definition of ‘research’ by using client commissions to cover non-eligible costs and services,” Wheatley said.

The FCA will publish the consultation in November and a final decision will be made later. The watchdog is in discussions with European Union officials on implementing rule-changes across the 28-nation bloc on what can be considered commission charges, Wheatley said.

Corporate Access

The move would mean fund managers must either pay for the research themselves or invest in creating their own reports. The FCA found examples of “poor practice” of passing on costs like their data terminals to clients, Wheatley said.

“The FCA appears to be one by one dismantling the shoddy and dishonest practices of the U.K. fund management industry,” said Alan Miller, chief investment officer of SCM Private, a fund management firm in London. The ramifications “are wide-ranging. Since the job of research is the key ingredient of what asset managers do, it should be included in the annual management charge rather than as an extra hidden charge.”

Fund managers also spent as much as 500 million pounds ($800 million) last year through commissions to brokers to facilitate access to corporate executives, Wheatley said.

“This practice transfers the firm’s costs onto the client, which clearly works against the client’s interests,” he said.

U.K. fund managers were responsible for 5.4 trillion pounds at the end of 2012, a 6.5 percent increase from the previous year, according to the FCA. Nearly half of their clients in Britain are pension and insurance funds, the watchdog said.

The Investment Management Association, a London-based group representing the fund industry, will release a review on research in the next few months.

The IMA’s objective is to ensure “transparency and accountability to our customers and we will explore all possible avenues to make sure we do just that,” Godfrey said.

To contact the reporter on this story: Suzi Ring in London at

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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