Why Allow Brokerages To Be Fund Managers ?

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trajan

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To me there's an clear moral hazard in allowing stock brokers to also have "separate" divisions which carry on significant business doing things like:

* Managing investment funds for individuals and businesses

* Helping large private companies to launch share offerings on the stock market

* Acquiring and managing real estate investment portfolios

It's truly naive to think that Alf in Wealth Management won't be swayed to any degree by the most "earnest" entreaties of Wilf in Trading who is trying to sell off hundreds of thousands of shares for a new plc client.

Even more so when you think that Alf depends exclusively on the brokerage's own Analysis department to mark his card on what to invest in.

And all that's not to mention that Alf and Wilf fought side by side on many a dirty rugby game and ended up marrying two sisters.

There was a recent directive in the UK for large audit firms to separate the audit function into a wholly separate commercial entity.
I see no reason why the same logic, i.e. design out the potential for graft, should not apply for stock market brokerages.
 
I am truly amazed that people here have no opinion to express on this matter.

While there must be trading only brokers in Ireland, most of the biggies are full service operations, i.e. they offer fund management (they buy and sell shares to maximise value/income desires of clients), analysis, managing IPOs, (maybe) selling government and corporate bonds.

I would find it healthier if brokers be simply allowed to trade sell-offers to buy-offers and to provide large scale stock selling to companies/investment funds/fund managers at rates below the standard rate for trades. Similarly, fund managers would only be allowed to invest funds and maintain essential support services, e.g. research & analysis, for the various (i.e. bond/equity/money/derivative/commodity/etc) markets they operate in.

But it's illuminating about so many Ask About Money members here who are absolutely nonplussed o_O about moral hazards of our stockbrokers.
Good day, chaps.
 
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I can’t for the life of me find it now but when I was thinking about this a few years ago I read an article that suggested that the skill set was similar for both sides of the house and that Ireland was too small a market to break them into different divisions.
I see it as a similar issue to actually getting “independent” advice and I’m glad that something like AAM is here to at least give you a sense that people do think about this stuff.
 
But there are companies who do exactly what you say and just manage investments that are not their own, making them unbiased. For example:

- Quilter
- Brewin Dolphin
- Smith & Williamson
 
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Gordon Gekko said:
But there are companies who do exactly what you say and just manage investments that are not their own, making them unbiased. For example:

- Quilter
- Brewin Dolphin
- Smith & Williamson
Click to expand...

Gekko, the real point here is that NO BROKER should be allowed to operate both sides of the game even if the above firms were just earning their salaries through basic brokering. Anyway, all of these above three have other conflicting operations beyond simply brokering stocks & bonds. They are all financial advisors and investment/wealth managers. Smith & Williamson are major accountants in the UK, for heaven's sake.

Brewin Dolphin (a lovely name) have this conflict policy summary here that reads very well.
But of course no one can provide testimony on their own behalf. I'd like to know how this policy is externally policed.
I doubt if there is any specific external policing of BD's policies against conflict.

I doubt if there would be much margin in the brokerage business alone these days, especially considering how online self-service trading has advanced in recent years. So the attraction of staying in this business is likely that being a broker means that people with wealth come to you often. And that presents an opportunity for unscrupulous financial professional to try and get them to invest in funds the multiple-service "broker" may have a separate interest in.

That's the crux of it, I think. The brokerage practice is just a lazy investment manager's way of catching well-off people. If they were in London or New York they'd have to produce real fund growth stats to attract the same type of person. Then they'd have to rationally and sensibly convince these prospects of the merits of investing with their firm. Not as easy as sitting around in a centrally heated office and waiting for a phone call from Jack Ignoramus about what to do with his Da's money . . .
 
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Gordon Gekko said:
But there are companies who do exactly what you say and just manage investments that are not their own, making them unbiased. For example:

- Quilter
- Brewin Dolphin
- Smith & Williamson
Click to expand...
I use Quilter for my discretionary fund manager business. They charge a flat fee and don't make and sell their own products. There was an instance where they were paid a commission after investing into a fund for a client and they credited it back to the clients account. Can't be fairer than that.


Steven
www.bluewaterfp.ie
 
SBarrett said:
I use Quilter for my discretionary fund manager business. They charge a flat fee and don't make and sell their own products. There was an instance where they were paid a commission after investing into a fund for a client and they credited it back to the clients account. Can't be fairer than that.
Click to expand...

Neither here not there.
Quilter Cheviot are a multi-service brokerage. They do so much more than simply buy/sell securities on behalf of their clients.
Potential for graft is definitely there.
 
trajan said:
Neither here not there.
Quilter Cheviot are a multi-service brokerage. They do so much more than simply buy/sell securities on behalf of their clients.
Potential for graft is definitely there.
Click to expand...

Steven has given an example of how Quilter operate ethically in practice. Could they possibly get up to dodgy practices if they wanted to? Sure. So could everyone else. If people have a mind to be deliberately dishonest, they will be, and no amount of regulation will stop that. Dishonest people will always find ways to get around regulations. A regulator has to find a balance between over-regulation which puts firms out of business because it's too hard to earn a living - not good for consumer choice - and under-regulation which allows cowboys too much leeway.
 
SBarrett said:
Like what?
Click to expand...

You just told us that they do discretionary fund management. This means that Quilter Cheviot provide a service to buy/sell into a client's fund in accordance with the client's criteria and available opportunities. You being a high-end financial adviser who is likely CFA qualified, experienced and very au fait with fund pros & cons, might feel confident in giving QC such a loose rein. After all, you can keep a careful eye on things.

But I (or Joe Soap) may know next to nothing about possible catches in some security purchased on our behalf - so we can't keep up with QC and any mischief they may be doing. QC fund managers appreciate this and - without respect to any agenbite of inwit ;) - may act in their own best short-term interests without us knowing anything about it.

Dave Vanian said:
Steven has given an example of how Quilter operate ethically in practice.
Click to expand...

To me, @SBarrett has simply shown how an independent financial adviser disburses commission on products bought for a client. Most independent financial advisers operate this way by default but can vary it if the client prefers a reduction in fees in lieu of the FA collecting commissions - all assuming that the client would have chosen this product in the first place.

The real thing here is that Quilter Cheviot make most of their revenues through other more lucrative services. If they buy/sell shares, it is only in the context of these other services. They may buy 100 shares for a financial adviser in the name of his client X. But this is only to encourage more business from that financial adviser.

I am not knocking the profession of fund manager: I suppose 99% of them will honestly do a job the rest of Joe Public just can't do.
But their capture of managed fund clients ought to come from comparative performance data other than simply having a broker's licence in UK/Ireland. And independent financial advisers should be mindful of the performance of a fund manager when disposing client funds with them.
 
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trajan said:
You just told us that they do discretionary fund management. This means that Quilter Cheviot provide a service to buy/sell into a client's fund in accordance with the client's criteria and available opportunities. You being a high-end financial adviser who is likely CFA qualified, experienced and very au fait with fund pros & cons, might feel confident in giving QC such a loose rein. After all, you can keep a careful eye on things.

But I (or Joe Soap) may know next to nothing about possible catches in some security purchased on our behalf - so we can't keep up with QC and any mischief they may be doing. QC fund managers appreciate this and - without respect to any agenbite of inwit ;) - may act in their own best short-term interests without us knowing anything about it.



To me, @SBarrett has simply shown how an independent financial adviser disburses commission on products bought for a client. Most independent financial advisers operate this way by default but can vary it if the client prefers a reduction in fees in lieu of the FA collecting commissions - all assuming that the client would have chosen this product in the first place.

The real thing here is that Quilter Cheviot make most of their revenues through other more lucrative services. If they buy/sell shares, it is only in the context of these other services. They may buy 100 shares for a financial adviser in the name of his client X. But this is only to encourage more business from that financial adviser.

I am not knocking the profession of fund manager: I suppose 99% of them will honestly do a job the rest of Joe Public just can't do.
But their capture of managed fund clients ought to come from comparative performance data other than simply having a broker's licence in UK/Ireland. And independent financial advisers should be mindful of the performance of a fund manager when disposing client funds with them.
Click to expand...

But one of the first questions that any client looking to allocate money to someone like Quilter should ask themselves is “do these guys give their clients data to ARC? Asset Risk Consultants independently compare wealth managers. My understanding is that Quilter do.
 
Gordon Gekko said:
But one of the first questions that any client looking to allocate money to someone like Quilter should ask themselves is “do these guys give their clients data to ARC? Asset Risk Consultants independently compare wealth managers. My understanding is that Quilter do.
Click to expand...

Like many Joe Soaps, I never heard of this ARC outfit - you are clearly accustomed to a more sophisticated client than I.

But even if I knew them, I'd be unlikely to be able to afford their analyses for checking on a small portfolio.
What I had in mind would be more like what used to be in in the Financial Times lists of funds, bonds, etc.
Except with more elaboration.

ARC cannot get primary data that is legally unavailable to other members of the public. All primary data available must be statutorily required or we would not see it or derivatives of it. Given that, it would make more sense for a state bureau to prepare performance lists for the various funds registered as investible by ROI residents in the interest of both public protection and the reputation of our financial services sector.
 
A client doesn’t pay ARC.

The companies pay them as I understand it.

ARC then harvest the actual client data and measure the performance of the managers relative to their peers.

But in the UK, for example, not giving your data to ARC would be a door slammer.

It’s heading that way here too.
 
Having the companies pay ARC to display those performance data that the companies choose to provide them . . .
Hmmm :oops:.


Gekko, it sounds like a long camino to financial salvation . . .

(Sorry for using the holy name, Brendan. Edited out now.)
 
trajan said:
You just told us that they do discretionary fund management. This means that Quilter Cheviot provide a service to buy/sell into a client's fund in accordance with the client's criteria and available opportunities. You being a high-end financial adviser who is likely CFA qualified, experienced and very au fait with fund pros & cons, might feel confident in giving QC such a loose rein. After all, you can keep a careful eye on things.

But I (or Joe Soap) may know next to nothing about possible catches in some security purchased on our behalf - so we can't keep up with QC and any mischief they may be doing. QC fund managers appreciate this and - without respect to any agenbite of inwit ;) - may act in their own best short-term interests without us knowing anything about it.



To me, @SBarrett has simply shown how an independent financial adviser disburses commission on products bought for a client. Most independent financial advisers operate this way by default but can vary it if the client prefers a reduction in fees in lieu of the FA collecting commissions - all assuming that the client would have chosen this product in the first place.

The real thing here is that Quilter Cheviot make most of their revenues through other more lucrative services. If they buy/sell shares, it is only in the context of these other services. They may buy 100 shares for a financial adviser in the name of his client X. But this is only to encourage more business from that financial adviser.

I am not knocking the profession of fund manager: I suppose 99% of them will honestly do a job the rest of Joe Public just can't do.
But their capture of managed fund clients ought to come from comparative performance data other than simply having a broker's licence in UK/Ireland. And independent financial advisers should be mindful of the performance of a fund manager when disposing client funds with them.
Click to expand...
Quilter don't create or sell their own products. They also charge a flat fee (and have always done this in the 20 years I have been dealing with them)
so there is no financial incentive for them to be making loads of trades on a clients account.

From your posts, it looks like you read articles about what went on at Davy and decided that every other fund manager/ stock broker is doing the same. Without any examples or evidence of any wrong doing. I have been working in this industry for over 20 years and I have seen first hand who is working in their own interests first and the clients second. I was not surprised of what went on at Davy and I am not surprised (but I am constantly frustrated and angered) at the exploitation of people's lack of knowledge around the complex world of financial products to cream a nice big commission at the clients expense. When you work in the industry, you can spot them a mile off and you can also spot who is saying one thing and doing something else. But by and large, product providers are on the level and charge clients based on aum and that's it.


Steven
www.bluewaterfp.ie
 
SBarrett said:
When you work in the industry, you can spot them a mile off and you can also spot who is saying one thing and doing something else.
Click to expand...

Gordon Gekko said:
I have no connection with them, but if my Granny told me she’d just signed up as a client of Quilter, I’d be happy.
Click to expand...

You men don't seem to get a couple of things here.

1. Efficient elimination of graft can never be based on proving actual graft: it's too hard to prove in law.
It has to be based on minimizing potential for graft through proper regulation of operations.

2. Ordinary people cannot make crucial financial decisions based on individual assurances - however well-qualified and unctuous their presenters may be. They need more objective measures of merit. And more compelling punishments for grafters.

I acknowledge that many financial advisers and most investment fund managers act responsibly and diligently towards their clients' money. So a state-imposed performance reporting process for their funds should not be a major imposition upon them.
It may even help to weed out the bad people from the profession, as well as offer well-performing fund managers the reputation they deserve regardless of the scale of their firms.
 
"Graft" has other less socially constructive connotations that you can look up for yourself.

Imagine an old Farmer's Journal cartoon with a dark-complexioned figure in M & E Dealy Stockbrokers & Fund Managers overalls. He is stooping over his grafting press to join together a scion and a rootstock, beside him are two bunches - scions labelled "Old Boys' Funds", rootstocks labelled "Sucker Irish Investors".
In the foreground is a suited and spruced-up official with an IFSRA badge remarking vacantly about how Mr Dealy typifies the enterprise that has brought the financial services sector in Ireland to the forefront. His companion muses silently about how officials like him typify how light-touch regulation and wilful ignorance have brought shame on this vital economic sector.
 
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Graft confused me too, but I understood your intent.

I agree we should set things up in a way to minimize the chance/ease/option of wrong doing. I thought there were meant to be Chinese walls or similar.

But, even if stock brokers only bought and sold shares, they can still get up to no good.

I'm execution only with Davy, and I have often considered some of the places that they could be creaming off the top. E.g.

Not completing your buy and sell at the best price on the market.

Foreign exchange rates

Earning interest on your cash deposit (not these days!)

Loaning out my shares
 
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