BlackRock's Largest Funds Slash Commissions Tied To Sell-Side Research

Apr 4 2017 | 8:14pm ET

by Trevor Hunnicutt and Olivia Oran (Reuters) - BlackRock, the world's biggest asset manager, slashed the amount it paid out in commissions to Wall Street firms for research by more than half for its largest mutual fund over the last two years, according to filings.

The cuts show the immense power large asset managers have to curb fees they pay banks and the diminishing role of sell-side research at a time when Wall Street firms are facing a slump in stock trading commissions.

BlackRock's $40 billion Global Allocation Fund paid out $13.4 million in commissions in the 2016 fiscal year for trades tied to research, compared with $28.8 million two years earlier.

The commissions fell even though the BlackRock fund routed roughly the same level of transactions to brokerages in exchange for access to their research notes and other related services.

The same pattern is true for other big BlackRock funds, according to a Reuters analysis of U.S. Securities and Exchange Commission filings from three of BlackRock's five largest funds. Some of those funds paid out more in total commissions, but trading activity in those funds increased to a greater degree, meaning that the actual commission rate fell.

A BlackRock spokeswoman declined to comment.

In announcing an overhaul of its actively managed equities business last week, BlackRock said it was "harnessing the power of 'human and machine,'" relying more on computers and data-mining to pick stocks.

Equities revenue, which includes executing stock trades and buying and selling derivatives related to stocks, is slumping across Wall Street.

In 2016, equities revenue across the world's biggest banks declined 13 percent, to the lowest level since 2012, according to research provider Coalition.

The outlook is not expected to improve.

For the first quarter of 2017, JPMorgan Chase predicts equities revenue across the industry fell 3 percent year-over-year, compared with gains of over 20 percent in both investment banking and bond trading.


Structural changes to the equities business over the last several years, such as the rise of electronic trading, have knocked off around $15 billion from the equities fee pool, according to a report from Morgan Stanley and management consulting firm Oliver Wyman.

Electronic trading has dramatically increased trading volumes, while making the cost of trading much cheaper.

Oliver Wyman partner Christian Edelmann, who co-authored the report, does not see those revenues coming back. "Once the equities model has become technology driven, that's not going to change," he said.

Other factors are expected to strain the equities business further.

Asset managers including BlackRock, which last week also said it would cut jobs and fees in its active equities business, are under enormous pressure due to weak returns and competition from low-cost options like index funds.

The fee squeeze is making firms more selective about how they spend research dollars.

At the same time, the long-running practice of paying for research through trading commissions is being upended by new regulations in Europe, known as the revised Markets in Financial Instruments Directive.

Part of the overhaul will force investors in the European Union to pay for research directly, meaning banks will be required to put price tags on their proprietary analysis. Global asset managers are expected to "unbundle" payments in other regions as well.

Asset managers and hedge funds typically determine their research budgets through a process called broker votes in which portfolio managers rate the value of equity research analysts. The broker vote helps firms decide which research providers to keep and how to allocate their research dollars.

Asset managers have gained leverage because they have an increasing variety of choices of trading venues and research providers, including independent firms unaffiliated with the big banks. And a push for high-value ideas has caused some to build up more research capabilities in-house.

Banks are doing what they can to keep their research products relevant, such as employing more data scientists to support research from traditional stock analysts.

Banks have already been trimming their research budgets. Spending on research at the top investment banks fell by just over half to $4 billion in 2016 from $8.2 billion in 2008, according to Frost Consulting.

BlackRock has managed to keep its funds' spending on commissions for research under control. Spending on commissions by its $21 billion Equity Dividend Fund increased by 39 percent from the 2014 to 2016 fiscal years, but the fund's transaction activity more than doubled, meaning that its commission rate overall decreased considerably.

The commission rate paid for research by BlackRock's nearly $15 billion Multi-Asset Income Fund also fell over the 2014 to 2016 fiscal years, plunging by nearly 41 percent.

One of BlackRock's five largest funds has not yet disclosed 2016 data, while another does not direct trades to brokerages in exchange for research.

The funds use the brokerage services of major banks such as Bank of America, Goldman Sachs and JPMorgan. The filings do not identify which of the banks provide research to BlackRock.

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