Brokerages formalize client service evaluations

NEW YORK & LONDON, June 28, 2011 – Commission allocation by buy-side firms on both sides of the Atlantic now begins with the broker-voting process, says TABB Group in new research announced today.

The buy side is challenged with divvying up an already slender commission budget. With the research payment model shifting toward a more unbundled structure, there is an increased requirement for transparency around how brokers are paid and buy-side firms in the US and Europe tell TABB that they are moving to a more formal method of evaluating core brokerage services.

Beyond cutting broker lists and implementing commission-sharing agreements (CSAs), Cheyenne Morgan, a TABB research analyst and author of the new report, “The Broker Vote: Complexities of the Buy-Side Ballot,” says buy-side firms want to allocate research dollars more effectively. “By moreactively tracking the services they’re consuming and formally placing a value on them, the buy side is developing a comprehensive method that rationalizes just how much it pays its brokers.”

From small hedge funds to large asset managers, whether formal or informal, the broker vote is now an integral part of commission management. The problem, says Morgan, begins when the sell side has 500 different firms sending in scorecards in 500 different formats. Brokers receive some scorecards that are tallied in points; others are graded on an A-to-F scale; and others on a scale from 1 to 5.

Although Microsoft Excel still reigns as the number one tool of choice for carrying out the broker vote, an increasing number of firms are realizing that there are significant inefficiencies associated with a manual Excel process. In order for a broker to obtain an aggregate view of how clients rate their services, it first needs an apples-to-apples interpretation of all the votes.

Several vendors now offer broker voting services, automating the process that gives the buy side a mechanism to consolidate, track the services used – or not used – across their firms and formulate budgets for each quarter.

With the regulatory environment moving toward an increased unbundled structure and an increase in compliance requirements for transparency around research, she says, “buy-side firms need to implement a process that tracks the rationale behind paying out commissions to brokers.” She adds that brokers continue to struggle with the need to place a value on their services. “This requires brokers to be at the cutting edge of analyzing client behavior.”

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