Commission sharing agreements mark big trading houses’ newest attempt to win mutual fund companies’ business, while offering the array of research they seek, according to The Wall Street Journal. In response to an increasing demand for more transparent costs and unbundling of fees, commission sharing agreements to fund companies allow mutual fund managers to simply tell traders what research they want, and how much to pay for it. The brokerage house then pays for the research out of their trading commissions. The idea is to stop mutual fund companies from partnering with scores of separate brokerages, thereby concentrating their lucrative trading business. In the past, when one fee bought both trade execution and research, mutual funds would contract with as many as 100 different trading houses to ensure getting the widest possible array of? research. “The biggest ‘pro’ is that you can trade with firms that are great trading firms and obtain great research from great research firms—you don’t necessarily have to mix those things together,” said Richard Whitney, fund manager and head of the committee overseeing commission allocation at T. Rowe Price in Baltimore. For investors such arrangements could mean a clearer breakdown of costs. Oppenheimer Funds has hammered out roughly 36 such arrangements with their trading partners, including industry titans, such as Bear Stearns, Lehman Brothers, UBS, and Merrill Lynch. Jay Bennett, a consultant at Greenwich Associates, a consulting firm in Greenwich, Conn., said his company expects such agreements to continue to gain popularity. But not everyone agrees they work well. “I no longer have a financial arrangement with my client,” said Lisa Shalett, head of research at Sanford C. Bernstein. “I now become dependent for my revenue on my competitor.” Smaller brokers will also be especially challenged, said Bennett. Fund executives also worry that if large companies reap a greater share of their business, trading patterns may emerge, and brokers could then share those patterns with competing funds. Goldman Sachs has been allowing such arrangements since 2004, and Boston-based Fidelity has been using them since the mid 1990s. Fidelity still used these arrangements in part, but drew special attention last year when it announced that the company, not shareholders, would pay separately for research. This summer, the Securities and Exchange Commission sanctified commission-sharing agreements formally in a report on the use of so-called soft-dollars. “We recognize the benefit to investors of money managers being able to …separate the trade execution from access to valuable research,” the federal agency said. The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.
Processing Content
