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.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

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.

Advertisement - Article continues below

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.




The power of mean reversion

When it comes to investing in funds, don’t chase the top performers – look for the cheapest ones.
1 Apr 2019

The most important number to look at before you buy any fund

Many investors get distracted by past performance when they buy a fund. But there’s something else to consider that will have a much bigger influence …
22 Mar 2019

Investment trusts: the Cinderella of investment arrives at the ball

Investors should look beyond the market noise of a single year and examine the bigger picture. Max King explains what we can learn from 25 years of in…
8 Jan 2020
Stock markets

The boom in passive investing won’t cause the next crash

Passive investment funds such as ETFs are now such a fundamental part of financial markets that some people worry that they will spark the next crash.…
7 Jan 2020

Most Popular


Currency Corner: how is the New Zealand dollar doing against its US counterpart?

The New Zealand dollar has been doing well against the US dollar in recent months, but has started to wobble a little. Is it still a buy? Dominic Fris…
20 Jan 2020
Share tips

India’s small and mid-cap stocks are set for big gains – here are three to buy now

Each week, a professional investor tells us where he’d put his money. This week: David Cornell of the India Capital Growth Fund highlights three favou…
20 Jan 2020
Share tips

Class acts going cheap: buy into Europe’s best bargains

Value investing appears to be making a comeback, while shares on this side of the Atlantic are more appealing on metrics such as price/earnings ratios…
16 Jan 2020
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
17 Jan 2020