Independent brokers vulnerable without differentiated research – report

Fundamental changes in the equities sector are leaving independent brokers increasingly vulnerable unless they can offer differentiated research and advice from the commoditised research from large investment banks, according to the findings of a survey from professional advisers, The McLean Partnership.

Low investor confidence is impacting independent stockbrokers with declining commission allocations and their vulnerability is exacerbated by competition from investment banks, the impact of new technology and over capacity, the report said.

The conclusion is that independent brokers can no longer rely on market trading to earn a living. At the same time they are experiencing a `brain drain` of top analysts exiting the industry or setting up as consultants.

“Only firms who can deliver stand out research and value added advice will flourish,” said Nicholas Gebbie, Managing Director of The McLean Partnership.

“Ironically, there are still too many brokers, yet fewer talented analysts to produce strong research on which fund managers depend to make the best investment decisions for our pension funds. Increasingly we have to search for talent outside the financial sector, such as industry.”

Fund managers value research from independent brokers but these firms will continue to decline, both in terms of earnings and the quality of content they are able to produce, until there is greater transparency in payment and a correlation between fund managers votes for research in broker reviews and the resulting commissions allocated.

“If we are not careful, the equities industry will hasten its own decline as more talent exits the industry to provide intelligence and advice to institutions and corporates through more effective channels,” concluded Gebbie.

The McLean Partnership advises both investors and product providers and questioned 100 professionals from both sides for the report.

The findings highlight a dislocation between what the “sell side” thinks its clients value and what the “buy side” actually values, the firm noted.

Additionally, each side differs in what it views as a sustainable total compensation level, with the “sell side” believing it requires up to 60% higher basic salaries than their “buy side” clients. A majority of fund managers also confirm that external surveys to rate analysts are worthless.

The key findings are:

Research – fund managers value independent research more highly than the `commoditised` product from the larger (“bulge bracket”) investment banks. Some 80% of the fund managers questioned said they valued fundamental research and bespoke work more highly from independent research providers. The study confirmed fund managers are now increasingly opting to pay for independent research via the CSA route.

Market Trading and Corporate Access – fund managers valued the bulge bracket investment banks for execution and co-ordinated corporate access with 80% concurring of those questioned. The “sell side” view supported this, accepting that independent brokers hold no more than 35% market share in European equities trading and that the bulk of commissions and revenue from fund managers flow to investment banks, which effectively trade for free.

External Analyst Surveys – over 60% of fund managers viewed external surveys as a means of grading analysts as worthless. Most saw them as `big bank marketing exercises` with several calling for their abolition and one commentator suggesting that brokers sending begging emails for votes to be disqualified. In contrast among the “sell side” just under 30% viewed surveys as worthless, but several called for an end to voting

Sustainable Compensation – the “sell side” view of a sustainable basic salary was significantly higher than the level the “buy side” viewed as acceptable for a comparable position. The consensus among fund managers was that up to £150k is the sustainable ceiling level for a leading fund manager, while the sell side viewed up to £200k for an MD of a mid-tier or specialist broker and £250k for an MD of a full service investment bank as the limit. However, there was consensus on bonuses with both sides viewing 50:50 a realistic and sustainable ratio between basic salary and bonus,

Restoring Investor Confidence – asked what factors will help to restore investor confidence in equities, both sides placed resolution of the euro crisis as the most important factor, with momentum behind US recovery in second.


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