Mercer Eyes Transaction Costs

March 19, 2002 ( - UK fund managers are not keeping a firm enough hold on their transaction costs, a survey by William M. Mercer finds.

Less than half, or 45%, of fund managers surveyed use third-party transaction measurement services, while only 10% have in-house systems for this purpose, according to Mercer.

The consultant conducted the survey to establish the asset management industry’s approach to controlling the costs incurred when buying and selling shares for their clients.

Soft Commissions

Mercer also found that the use of soft commissions, where a broker will pay for some of a fund manager’s costs, in exchange for a larger trading allocation, is dying out. More than half the sample, or 55% do not use soft commission. 

Some have ceased this practice following publication of the UK government’s Code of Best Practice for Pension Schemes, after the Myners Review cited potential conflicts of interest arising from this practice, according to Mercer

Crossing Networks

In addition, the survey revealed the increasing use of electronic crossing networks, which enable buy and sell orders to be matched without the need for a dealing spread. Some 69% of the managers surveyed now use such networks, allowing them to reduce their transaction costs.

Broker Commission

Broker commission varied considerably among the participating fund managers. According to Mercer, the norm may be close to 0.15% for UK trades though the survey revealed a range from 0% for “net” trades up to 0.3% for difficult trades. 

This suggests that the average rate for UK equity business is slightly lower than that in most other countries – rates in Europe and the Far East generally exceed 0.2%. 

Stamp duty, however, is a major cost element, making the UK a very expensive market in which to make transactions, the study notes.