The FSA turned its regulatory attention firstly to the banks and then…and then it was down to RDR, that started in 2006, to change how financial advisers and asset managers are regulated with one of the weaknesses of RDR being that it has focussed on the advisers and the independence of their advice rather than the way asset managers operate.
Conflicts of interest
It looks like the FSA is now, however, turning on the asset management houses.
As well as the ongoing confusion about who exactly benefits from stock lending (the investor or the fund group) in the past few weeks the fund houses have found themselves accused of profiting from delaying their purchase of units on behalf of a client; making money out of ‘box management’ and the difference between ‘creation’ and ‘cancellation’ unit prices that they set themselves; and the latest one where they are spending investors’ money on gaining access to chief executives of companies they invest in or could potentially invest in.
In the same way there should be transparency between an individual and their portfolio/wealth manager, there should be transparency between both of these and fund managers when clearly this is not always the case.
But is the situation as bad for fund groups as it would currently appear? Are they recklessly spending investor money inappropriately?
No. Or at least if they are it is not as scandalous as some would like.
Stock-lending apart, the reason these last three accusations have come out now is because the FSA and the IMA are both examining the transparency surrounding the way fund managers operate and looking to improve it.
For instance, it would appear that, certainly in the case of the first challenge – the timing of unit purchase – only a tiny minority of fund groups are known to be actively practising it as the bigger players are sensible enough to work out the downside risks of mistiming a market purchase.
Encourage transparency
On the surface, the second charge – box management – is one that groups readily admit to, as is the third though it is not quite as blatant as meeting a broker in a motorway service station and handing over a wad of cash in a brown envelope to meet a chief executive.
The thing with both of these is how transparent the fund groups are in disclosing how they ‘box manage’ (if that is the right term) and how they get access to company CEOs.
Taking just the third challenge, fund groups are allowed to use client commissions to pay for trade execution and research and getting in front of CEOs is arguably the single best piece of research a potential investor can do. What is totally against the grain, ethically, is explicitly paying a third party to arrange such a meeting.
In the real world, most fund management groups have a pool of money with which to pay brokers for their various services of which, added to research, trade execution, idea generation et al, corporate access is a part.
Most fund management companies decide how to divvy up this pot and, according to Peter Sleep, a senior investment director at Seven Investment Management: “This is where this myth of paying for corporate access has come from.”
Added to this, he does not know of any instances where fund managers pay explicitly for corporate access and thinks that fund managers generally already get very good access when they want it.
More closely defined research
Admittedly, a straw poll of a few is no way to win an argument, but the point I am trying to make is that access to CEOs is not the problem – unless you are not getting access, that is – and brokers already perform an invaluable role in getting investors in front of CEOs.
And these CEOs also benefit from getting in front of potential investors so it is hardly a one-way bet.
Where this may fall down is that, as with many things, the firm with the biggest pot to invest from probably gets the first and freshest meeting.
The punchline to all this is that the FSA and the IMA are already on top of this, with investor transparency at the top of the agenda.
One of the reasons these various accusations are being levied now is because in November the FSA published a paper called “Conflicts of interest between asset managers and their customers: identifying and mitigating the risks”, giving fund groups a deadline of 28 February for their replies.
Two days later, the IMA wrote to its members about the use of dealing commission to pay for corporate access with a deadline for comment of 26 February.
I am not saying that fund groups are all above board and squeaky clean when it comes to either their relationships with brokers or their transparency of how they use client commissions. But when it comes to paying for access to company CEOs they may be forced to be that bit more explicit in how they pay for “research”.
