Paying Up: The Hidden Cost Of Portfolio Management; Commission Recapture: A Way To Get Some Back?

Overview: Paying up is paying a brokerage commission over and above the cost of pure execution in exchange for research or other services from brokers. The part of the commission in excess of the cost of execution can be viewed as an indirect fee beyond the negotiated management fee that investors pay their investment managers. This fee is not visible and gets absorbed in the performance of the portfolio. As investment managers incur no direct cost for these services, they have little incentive to hold costs down. Arrangements like this may cause investment managers to trade more through brokers that provide additional services against execution-only brokers, which may not necessarily be in the best interest of the investor. In a commission recapture program, an investor gets back a portion of the commissions that investment managers pay to execute trades. The mere presence of a commission recapture program suggests that commission dollars are being used inefficiently, which strengthens the case for differentiating research and execution costs. When these costs are combined, a commission recapture program allows the investor an opportunity to “recapture” some of the inefficiencies. Plan sponsors must be careful in setting up such programs, as the recaptured commissions in a poorly structured program can be easily offset by invisible costs related to market impact and delayed executions.

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Format: HTML | Size: 38KB | Date: Jan 2003 | Pages: 13