Research house airs remuneration relationships

The chief executive of van Eyk Research, Mark Thomas, has explained the remuneration relationships between some of his research houses’ key dealer group clients and the research and funds management arms of the business.

Some of van Eyk Research’s largest and most lucrative clients, including Count Financial and Professional Investment Services (PIS), are subscribers to van Eyk Research and investors in its fund of funds product, Blueprint.

Like most funds management companies, Blueprint pays volume rebates to dealer groups. There have been suggestions that van Eyk Research gives free research to dealer groups that push money into Blueprint.

Thomas acknowledged that, where the size of the rebate exceeds the cost of the research subscription, “we net off the research costs against the rebates”. He said while the group does implement the two-way payments in one transaction, he insisted the payments were negotiated as separate contracts.

“You can’t bundle services, it’s against the law,” Thomas said.

“It’s two separate contracts. If they fell below the point where the rebate was covering it, we’d invoice them.”

Thomas said around a quarter of van Eyk’s dealer group research clients were also investors in Blueprint.

Professional Investment Holdings managing director Grahame Evans said while PIS does invest in Blueprint products in addition to being a research client, it does not accept volume rebates from the research house. Evans said the dealer group requested the rebate offer be removed from the contract at the negotiation stage.

"We don't get a rebate, we told them to take it out of the proposal," Evans said.

"We don't want our research conflicted by any of that sort of stuff. We also failed three of their Blueprint products - we've only got a couple [on our approved product list]."

Scrutiny of the business models employed by Australian investment research houses has heightened in recent months, particularly the types of payments received by research houses from fund managers and whether they have the potential to influence ratings. Thomas has been at pains in recent weeks to demonstrate that his group is free from commercial pressure from fund managers.

Thomas said the group accepts no shelf space fees from fund managers in its $1.5 billion Blueprint series, and that “the only fees we get from fund managers is when we sell them a subscription to our research, and that’s on commercial terms”. However, the group does outsource some of its research to Adviser Edge, a group that accepts payments for ratings and shares that revenue with van Eyk Research.

S&P Fund Services managing director Mark Hoven recently made the argument that “all research houses in Australia are paid by product manufacturers in some form, whether this is directly or indirectly”. Thomas rejected the suggestion that van Eyk’s own product-manufacturing arm subsidised its research arm.

“Funds management raises your cost base — you’ve got sales people, you’re competing with Colonial, you’ve got asset consulting and research people and you’re competing with [the likes of] Mercer and Russell, let alone the fund of funds from the banks.”

Van Eyk Research does not provide ratings on other fund of funds managers or multi-managers. While that move helps to avoid perceptions of competition conflicts where the funds management side of the business is concerned, it does not give van Eyk clients much choice on research where fund of funds are concerned.

Thomas said the only conflict related to the research house managing money was that “we potentially could front run and exit from an illiquid manager before putting out a rating”.

“We have rules around that example. Basis, for example, we put out a ratings downgrade in May [2006]; we waited until July to start withdrawing from Blueprint.”