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Unbundling of commissions - the next 'big thing' in Asian equities, according to UBS
"Already widespread in the UK, unbundling of advisory and execution commissions paid to brokers is set to become an imperative for the investment management and broking community in Asia," notes Julian PICKSTONE, Head of Asian Unbundling at UBS, speaking at the UBS sponsored Unbundling in Asia - Empowering Equity Commissions conference in Hong Kong.
"The bundling of advisory and execution commissions paid to brokers is not in the best interest of investors wherever they may be based. It is hard to achieve best execution when they must use a bundled commission to also pay for advice, perhaps provided by an inferior execution provider. It is also difficult for them to buy the best research if it is provided by an organisation with no execution capability," he said.
"Little more than a year ago, very few of us in Asia were aware of unbundling. However, in excess of 150 delegates have registered for what is Asia's first unbundling conference among them Chief Investment Officers, Chief Operating Officers, Head Traders and Compliance specialists - in other words, the very people who will decide the future shape of our industry. We are especially pleased that Hector SANTS, Managing Director of Wholesale and Institutional Markets at the Financial Services Authority (FSA) in the UK and a key figure in introducing unbundling there, has been able to join us," he added.
Under an FSA ruling in the UK that came into effect on 1st January this year, investment managers must disclose to their clients how much they are paying for execution services and research services. This has required the establishment of a separate price for each of these services. The FSA also ruled that soft commission agreements must cease on 30th June 2006, but endorsed the use of Commission Sharing Arrangements (CSAs). CSAs allow the transfer of commissions from a broker who executes a trade, to a third-party who has supplied a service of execution or research (a "permitted service") to the investment manager.
"In short, The FSA has introduced regulations that enable clients to make separate purchase decisions for execution and advisory services. They are free to choose execution counterparties entirely guided by their best execution criteria, while continuing to use commission to pay for the best research services available. The implications of unbundling have spread around the world as investors have quickly recognised that it can increase efficiency and, ultimately, improve fund performance. Asia will not bury its head in the sand," he added.
"Unbundling brings pricing transparency and gives investment managers a clearer view of the use of commissions. The ability to select research services separately from execution services, allows investment managers to choose from the best providers in each category. In light of this, we are offering separate service propositions in each area, based on client needs and tailored to suit their requirements. We believe UBS has a market leading product in execution and advisory, both here in Asia and globally.
"UBS is encouraging its clients to use the hybrid CSA, under which the commission on all their business is split into an execution and a research component. All research providers, both UBS and third-parties, are paid from the research component. In our view, this is the most transparent and flexible way to unbundle," he said.
"UBS is the largest share trader in the world as well as in Asia. Its unrivalled liquidity pool means that it is ideally position to provide its clients with the very best execution services," added Rob FLYNN, Head of Asia Client trading and Execution.
"I am confident that as clients seek to add value to their investment processes, UBS's combination of global and regional research product as well as its stock-picking track record in Asia will prove extremely attractive," added Nicholas PINK, Head of Asian Research.
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