“The broker vote is a fundamental part of commission management,” TabbFORUM writes. The process, purpose and importance of the broker vote continues to evolve as new technologies become available and as new regulations roll out. The broker vote is an integral part of determining how to allocate research budgets, and with MiFID II, it’s more important than ever to have a methodology in place.
What is a broker vote?
A process used by buy-side firms to assess the value of provider services, such as research, in order to determine how commissions will be allocated.
A broker vote (provider evaluation, broker review) is used by the buy side as a way to holistically evaluate the quantitative and qualitative value of research providers, whose services include corporate access events, bespoke events, research reports and analyst models. Based on the results of the vote, the firm determines how much to pay each research provider, and the trading desk allocates trading business in accordance with the vote results.
Who is involved in the broker vote?
Participants of the vote vary from firm to firm. The typical voter is anyone within the firm who consumes sell-side resources. Some firms only allow members of the investment team to vote, while others allow anyone who is receiving and consuming research from research providers to participate.
The process is typically managed by the broker liaison, although at some firms the head trader or director of research will manage the process.
What types of broker votes are there?
There are different ways to structure a vote. Firms can vote as teams or individuals, and voters can vote on each broker-dealer as a whole or more granularly by analyst or salesperson at the broker. Many broker vote platforms offer flexible voting options:
A standard broker vote allows voters to vote on standard interactions, such as corporate access events, research and sales. With this type of vote, the vote administrator can impose a cap on the number of points or dollars each individual or team is allotted. One example of a standard vote is if Ben’s firm sets a pool of 1000 points for its 10 investment professionals to vote on each of their 10 research relationships, then Ben would receive a 100 votes to distribute among his 10 research relationships.
A budget-based vote occurs when each voter receives a specific budget for their vote. For example, Ben might be given $10,000 to allocate across all of his relationships, regardless of how many relationships he has. MIFID II has been shifting the vote focus towards a budget-based vote.
Firms may have multiple votes occurring at one time, with a separate vote for the provider’s research team, sales team and trading desk (and corporate access in the U.S.). With multi-format voting, the broker liaison can open multiple votes at once in different formats. For example, if Ben is voting on Provider A, he can cast a separate vote for research, sales and trading at one time.
Weighting can be implemented, too. For example, a senior analyst’s vote may be weighted more heavily than an associate’s, or corporate access may be weighted more heavily than research reports.
Broker votes are typically conducted quarterly, semi-annually, or annually and usually last one week to one month, depending on the size of the firm and number of voters.
Why is the broker vote conducted?
At the beginning of this post we learned the two purposes of the broker vote:
- Determine the value of each provider to the firm
- Provide a guide for commission allocation
Along with commission allocation, the process also helps with research budgeting and can help eliminate overspending.
And there’s more. To provide a little background, the process has become more formalized, but in the past – well, frankly, even today – the process wasn’t well tracked and only conducted at a high level. A research provider may prove valuable overall, but it’s also important to understand which individuals at that firm have supplied valuable research and which have not. It used to be that “compensation was determined by an antiquated voting system (think High School Homecoming King) where asset managers put in their dibs and paid accordingly” (source). It was more of a popularity contest than anything.
With MiFID II, that mentality is changing. Let’s turn to MiFID II and the impacts of the new regulation on the broker voting system.
How will the broker vote change with MiFID II?
Before MiFID II, commission was often linked to voting and trade volumes; as a portfolio manager’s volume of trading and AUM went up, commission increased, even though the value of the research remained the same.
MiFID II requires investors to be more transparent in their valuation methodology. There needs to be evidence of how research providers are valued and why they are paid what they are. Commission can’t simply be based on qualitative measures anymore; instead, there needs to be a healthy mix of quantitative data, too. With this new requirement, commission will no longer be linked to a firm’s growing AUM, but rather to the value each broker provides.
So where does that quantitative data come from? Resource tracking. Regardless of how resource consumption is tracked, it’s important that your firm has a system. You need to provide transparency into the amount of consumed research, what type it is and how the investment team rates each report, event and model. This information should then inform the broker vote and remove biases from gut feelings or the most recent interactions.
Also consider that the broker vote is not just a look back at what has been provided; it informs future relationships, too. With whom do you want to maintain relationships? Who provides the most value to your investment process? Who are you paying a good portion of your budget but without justification?
How is a broker vote conducted?
Regardless of the size of an investment firm, the broker vote can be an arduous process. There are several ways a vote can be managed, and a number of factors that influence how a vote is conducted: size of the firm, regions covered, sectors covered and number of broker relationships. Here are the five ways we’ve seen broker votes conducted:
Yes, some firms conduct their votes with good ol’ pen and paper. The investment team fills out a paper ballot, and the broker liaison aggregates the data and takes it from there.
This is a more commonly used method. The broker liaison sends out an Excel template to each team or analyst, then collects all of the information to allocate commissions.
#3: In-house System
Larger firms may have the resources to build their own broker vote management system.
#4: Broker Vote Software Tool
There are software platforms that help automate the entire broker review process, justify spending and create a transparent methodology through informed voting. For example, this broker vote product integrates with a resource tracking functionality so when analysts are casting votes, they can view their consumption data for that provider directly within the platform to aide in their voting decision. Voting without consumption data as a reference often leads to a “recency bias,” and value may be forgotten as time passes. A broker vote software can also help vote administrators more easily manage multiple votes at one time, in one centralized place.
Some broker vote tools have a recommended vote based on their own weighting system and the quantitative data (rate card, amount of consumed research, number of corporate access events). Voters will then see a recommended vote for each broker or analyst, which the voter can then adjust as desired.
Three key benefits of having a broker vote software solution are 1) it saves a lot of time across the entire firm, from the operations team to the voters; 2) it maintains the integrity of the vote that may be lost in attempting to consolidate spreadsheets; and 3) gives the voter a central hub that auto-saves their work as they move through the process.
#5: Mixed System
Some firms may use a mix of the above options. This certainly isn’t ideal, but broker liaisons face challenges in training investment teams on new technologies that are outside of their standard workflows.
After the voting period ends, the broker liaison (or head trader) finalizes the commissions for each research provider, and then the commission is paid. Although many buy-side firms are reticent to reveal the exact vote scores or details of their broker vote system, most firms leverage their broker vote data to justify spend and guide discussions with their providers. Additionally, buy-side firms are able to share with their clients how their research budget is being allocated and therefore how that research is tied back to investment choices.