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Cash for corporate access

March 11, 2013
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The revelation last week that investment banks are charging fund managers up to £10 000 an hour to meet the chief executives of their corporate clients made little more than a footnote in the financial press.

It is, however, a shocking development, a damning indictment of the financial services industry, which underlines the urgent need for a fairer and more transparent system of charges. 

It’s not as if that £10 000 is the fund managers’ money anyway. It’s investors’ money. Your money. To be precise, it comes out of dealing commission - the money you pay, on top of the annual management charge, for the trades your fund manager makes. 

Payments for corporate access are becoming increasingly common - and more substantial - worldwide. A recent survey showed that the proportion of dealing commissions that European fund managers now spend on corporate access is 29% - up from 21% in 2010. That’s despite a ruling by the Financial Services Authority in the UK in 2006 that commission should only be paid for execution or research. 

As regular readers of this blog well know, we at Sensible Investing are very skeptical about the value of entrusting your investments to an active fund manager at all. The limited success they do have in outperforming the market is as much to do with luck as skill and in most cases doesn’t warrant paying the fees they charge. 

It is, of course, only right that active fund managers should speak to chief executives before deciding whether to invest in their companies or not. But it’s completely unacceptable for them to be paying grotesque amounts of investors’ money to a third party for the privilege. In fact it’s highly questionable as to whether the consumer should be funding such access at all. 

Interviewed by FTfm, Guy Sears, the director of the Investment Management Association, which represents the industry, claimed it was increasingly difficult for fund managers to gain access to companies - especially overseas - without using investment banks as fixers. He said there was “widespread confusion” about where the boundaries lie and called for a “grown-up discussion” on the subject. 

That is, of course, something we would welcome. But more than that, we need strict regulations and stiff penalties for companies who breach them. 

The signs are encouraging. Martin Wheatley, the incoming head of the new Financial Conduct Authority has raised the possibility of forcing fund managers to adopt an explicit fiduciary duty to their investors. 

Imagine it. Fund managers committing themselves to act in the best interests of their customers. Now there’s an idea.

Image: http://www.shellhospitality.com/The-Donatello 

 

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