How brokers use your money to pay backhanders

There is a fascinating little article by Leo Lewis in the Times this morning about Chinese officials. Regular readers will know about the clamp down on corruption in China and the effect we suspect that will have on sales of luxury goods (see past posts). But the Renmin University of China has looked at the subject through the prism of the “mistress economy.”

It turns out that 60% of the officials currently under investigation keep a full time mistress (no I don’t know the difference between full and part time mistresses either) and that “a significant proportion of Chinese luxury goods sales derives from men showering trinkets on their mistresses.” If the backlash against endless corruption means fewer mistresses, it will also mean fewer handbag sales.

But while this is interesting (and nicely backs up our anti luxury goods company stance), at the end of Lewis’s article comes an even more interesting little nugget. It seems that another part of China’s corruption merry-go-round has been for officials to charge stock brokers for their time. When brokers are taking clients to China, says Lewis, they like to “pepper the visit with meetings with relatively senior officials who can provide fund managers with a warm glow and a feeling that they have glimpsed inside the Chinese machine”. Later the broker bungs them $500 or so in thanks.

You won’t find this particularly surprising I don’t suppose, but what you might find surprising is that cash for access is just as common here in the UK as it is in China. Brokers have always liked to introduce their clients to politicians here (this is why so many have a lucrative sideline in paid speaking at City events) but they also like to introduce them to the CEOs of big companies. And it turns out that they charge for this too.

Turn to the FT and you will see that asset managers are “using investors’ money to pay for access” to the tune of “tens of millions of pounds a year.”

Client commissions are supposed to be used only for execution and research (and even the latter is iffy) but last year, figures from the annual Thomson Reuters Extel Survey show that some 29% of commissions were in fact used by brokers to pay themselves for providing access for fund managers to their corporate clients, in many cases without the CEO in question even knowing that his time was being charged for.

The FT is, quite rightly, shocked. The practice is, it says, “a breach of trust” and something that “smacks of the behaviour that has already given the investment banks a bad name.” It’s also a reminder that anywhere there isn’t transparency there is corruption.

On the plus side, just as ordinary people may now hope less of their money is being spent on other people’s mistresses, UK investors (some of the most over charged in the west)  may begin to hope less of theirs will soon be spent on paying for access their fund managers should be getting for free.

  • Changing Man

    Clearly we must end this immoral trade! I can’t believe that fund managers are being charged for access to politicians! If, as you say, it is important that they are provided with “a warm glow and a glimpse inside the Chinese machine”, could I suggest that they simply cut out the middleman and demand access to said mistresses if only on a part-time basis!

  • Shinsei1967

    When fund managers do their quarterly or half-yearly review of brokers they vote and rank them on a number of criteria: research, sales trading, access to analysts and corporate access. In recent years “corporate access” has become pretty much the most important single issue in deciding how commission is allocated.

    I suspect most brokers and fundies would be surprised this practice isn’t strictly legal.

  • Shinsei1967

    If its any consolation most institutional fund managers pay a minuscule amount in commission. A few basis points at most. Brokers make their money from sales trading (and the occasional large corporate finance fee).

  • Reluctant Banker

    So Fund Managers and Brokers scratch each others backs whilst providing no added value to the end user, in this case the company CEO instead of their own client investors.
    Basically nothing new in this story then !

  • Duh

    Re mistresses

    Full time as against part time is a euphemism for exclusive access.

    At the opposite end, brokers pimp whore officials to fund manager johns.

  • Insider

    Shinsei – who are the sales traders’ clients?

    The big story here is why are clients so willing to pay large amounts for management access? Perhaps there is information on offer which makes the £10k access fee good value?

  • Shinsei1967

    Fundies obv think getting access to the CEO is a valuable resource otherwise they’d direct more business to cheaper execution-only brokers.

    Obv you don’t get any price sensitive information but probably helps making long term decisions about management strategy and ability.

  • Daniel

    What is the issue? I want to find out about an opaque distant economy. So I cut down on time by hiring a local broker to set up a roadshow in said country (instead of trying to arrange myself). He isn’t going to do it for free (???) so obviously desrves a fee. Politicians very happy to attract investors will appreciate the platform provided by broker. Please where is the issue?

  • Jack

    I worked for a start up company funded by venture capitalists.

    Each year the company held a board meeting at an expensive golf club hotel or the like, paying for the venture capitalists to live the life of Riley for the day of the meeting and a day each side.

    This was justified by the reasoning that the company might need further funding and so should stay on good terms with the VCs.

    But since the company was paying, the VCs were living the high life at the expense of their investors. If they wish to live well , surely it should be from the proceeds of their management charges rather than on top of them.

    I thought this to be fraud.