Merryn's Blog

How brokers use your money to pay backhanders

It probably comes as no surprise that Chinese officials take bribes from investors. But the same thing happens here too. And you’re paying for it with your fund management charges.

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.

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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.

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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.

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