FTfm Supplement, March 11th, 2002, page 1.

Top fund managers stick to soft commissions

FTfm research reveals top firms flying in the face of UK government ultimatum

Nearly half of the leading UK-based fund managers still accept "soft commission" subsidies from brokers - even though the UK government has ruled that they should not be taken "without good reason".

In an FTfm poll of 40 fund managers, some 18 reported that they still cling to soft commissions. This involves brokers providing fund managers with services - such as research, Bloomberg and Reuters screens, and electronic dealing in return for their custom.

A further nine revealed that, while they do not use soft commissions for their UK pension funds, they do continue the practice for UK retail investors or clients outside the UK.

The wide-scale resistance to the government's attempts to clamp down on soft commissions is likely to sour relations further between fund managers and ministers. Last week a group of 22 investors fired off an angry letter to the government over its handling of the Railtrack affair.

The findings come as the UK's Investment Management Association, which fund managers controlling more than a £2,OOO bn of assets, prepares this week to unveil a draft industry-wide code on disclosing soft commissions and other costs of the fund management business.

Last year, the UK government urged the fund management industry to curb its use of soft comirussions. It was unhappy that this benefit system lacked transparency. The ultimatum followed recommendations by Paul Myners, former chairman of Gartmore, a US-owned fund management house, who conducted a controversial review of the UK's pension fund industry.

Ministers plan to review the take-up of soft commissions in March 2003, having received several calls for this practice to be banned. Meanwhile the Financial Services Authority, the UK's watch-dog, is reviewing the future of these subsidies.

But the FTfm poll shows that fund managers are divided over the merits of soft commissions. Eleven said they did not use soft commissions. "There is no reason why anyone should engage in this pernicious practice," said William Claxton-Smith, of Clerical Medical, part of UK bank HBOS.

Some have abandoned the practice in the wake of the Myners review and the government's ultimatum. These include Gartmore, Schroders and Scottish Widows Investment Partnership. Several others are considering plans to phase out the practice, including Deutsche Asset Management, Edinburgh Fund Managers -and Newton Investment Management.

But many fund managers are resisting the government's attempts to curb the use of soft commissions. These include some powerful global companies that operate in markets such as the US where "soft dollar" relationships are common.

Ian Martin, of Morgan Stanley, said: "We believe that the services provided by soft commissions give our fund managers valuable assistance in the decision-making process that benefits all our clients. Our global client base has differing opinions on the use of soft commission arrangements. In many parts of the world, such arrangements are actively encouraged."

It was widely pointed out that if fund managers did not use soft commissions, they would have to charge pension funds higher fees. Britannic Asset Management, the Glasgow-based fund manager, said:"If we did not enter into soft commission arrangements, additional pressure would be put on our fee rates. It is unlikely that brokers will reduce their commission rates if softing arrangements are not taken up."

Aberdeen Asset Management said: "If these services were provided by brokers, we would pay for them ourselves and be obliged to recoup the costs through management fees or other charges. This is simply a different way of funding essential services. None of the softing arrangements delivers frivolous benefits."