European regulators’ proposed reform of the fee structures of equity brokers, known as unbundling, which until now has been welcomed by clients of the brokers, should be handled with care, according to Greenwich consultant John Webster.

He questioned whether “the promised economic benefits of unbundling will be enough to offset some potential negative consequences to small institutional investors and independent providers of equity research”.

He said that regulators in all European markets were right to be concerned with ensuring that the end investor is not paying excessive trading commissions.

But Greenwich’s research suggests the price of trading is coming down due to such factors as the growing use of low-cost electronic trading and portfolio trading.

Mr Webster further believes that unbundling proposals as they stand could place smaller institutional investors at a disadvantage relative to the big players.

As equity brokers come under more pressure, he argued, they could be forced to rationalise their businesses. This could lead to a reduction in quality or availability of research that institutions use to inform their investment decisions, which in turn “could potentially have a real effect on performance”.

Investment houses are meanwhile hiring more in-house analysts, according to Greenwich, but the larger firms are being much more aggressive about it, which could leave smaller houses stuck with the worst analysts in-house and a diminishing pool of quality external research.

European institutions paid out more trading commissions in 2004 than they did in 2003, according to Greenwich, mainly due to the 23 per cent increase in total equity assets under management. But investors held the line on average European commission rates, which remained flat year to year at 18 basis pints per share.

RM

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