JFIM report to hasten shake-up
A tightening of the way fund management groups choose brokerages could accelerate a restructuring of the broking business, industry experts say.
Increasing competition, narrowing margins and high costs could force many brokerages to unbundle their services and focus on specialist niches, they claim.
The warnings follow the announcement by Jardine Fleming Investment Management (JFIM), the territory's biggest fund management group with assets totalling about US$20 billion, that they are to adopt a new method of awarding lucrative research and execution business among brokers.
A confidential report sets strict criteria - based on a brokerage's service and quality of work - which would be evaluated by the group's fund managers, country specialists, central dealing teams and back office.
Jardine Fleming uses more than 30 brokerages - including Jardine Fleming Securities, the agency broker to JFIM - with this year's total transactions expected to exceed US$8 billion.
Jardine Fleming Holdings director Chris Russell said the industry-wide trend to tighten selection criteria would result in some brokerages focusing on niche services.
Mr Russell anticipated that the large fund management groups, which tend to rely on their own research and have sophisticated administrative procedures, would increasingly look to brokerages which can unbundle their services.
Alternatively, specialist groups facing high fixed costs would look to the soft commission on offer from brokerages - such as dealing screens, valuations, broker reports - to offset their overheads.
While the criteria for choosing a broker is broadly consistent among the fund management groups - security, service, support and research - the emphasis varies.
'We take this issue extremely seriously,' Fidelity Investments' Asia-Pacific chairman Stuart Leckie said.
'We look at all the brokers on a worldwide basis because we are concerned about the financial strengths of the companies we deal with. They have to go through a rigorous process of selection. It is absolutely objective,' he said.
Fidelity Investments runs its global operations from Boston, London, Tokyo and Hong Kong.
Mr Leckie said the brokerages were reviewed every month for their quality of research, service and execution work.
Guinness Flight Asia managing director Royce Brennan said the key issues he considered were counter-party risk, capital adequacy and size of the operation.
Hill Samuel Pacific's director of risk management Cliff Forster said his main criteria were quality of service, research and execution.
Mr Forster said: 'Jardine Fleming is laudable to be seen to be avoiding any conflict of interest.' Hill Samuel, Fidelity and Guinness Flight do not run brokerages for their fund management operations.
Fidelity has a discount brokerage operation for its private clients in the US.