Lecture 7: Asset Management, Wealth Management and Research

Question 1

How are fee structures determined?

Answer 1

Assets managers specialise in different classes of assets, and therefore the fees paid are based on the asset class

Question 2

What are alternative assets?

Answer 2

Alternative assets include hedge funds, private equity funds and real estate.

Question 3

What are the two fee types for alternative assets?

Answer 3

1) Management fees: which was 1-2% of AUM

2) Performance fees: 10%- 20% of the annual increase in value of assets

Question 4

Fee structure: Equity & Convertible Instruments

Answer 4

1) Management fees: based on AUM

LESS COMMON for other fees to be charged

Question 5

Fee structure: Bond & Commodity Instruments

Answer 5

1) Management Fees: based AUM

Performance fees unusual

Question 6

Fee structure: Indexes:

Answer 6

1) Management fee: based on AUM

No performance fee

Question 7

What is the difference between asset management and wealth management?

Answer 7

Asset management =
- the professional management of INVESTMENT FUNDS for individuals, clients and families
- asset managers specialise in various asset classes and AM fees are paid based on the asset class
Wealth managers
- advise clients of the best asset classes to invest in - they are not directly involved in the management of assets
- More holistic view

Question 8

Why would a wealth manager allocate clients funds to another bank?
Where does a conflict arise?

Answer 8

• Wealth managers have a duty to help clients receive the best possible returns in the context of their risk tolerance
• Therefore, other investment banks may be offering assets that are more suited to the client, or performance of internal fund may be inferior to another bank
• HOWEVER - note compensation packages: many IBs include incentive systems that are designed to keep all clients investments within the bank - COI between management advisory and asset mgt function

Question 9

What is the difference between sell and buy side research?

Answer 9

Sell side:
Work for: Brokerage/ trading department in IB
Evaluate: Companies future earnings growth and recommendations on stock and other securities - buy sell or hold
Provide: blanket recommendations
Availability: Publicly available
Buy side:
Work for: Mutual funds, pension funds, hedge funds, institutional investors
Evaluate: Companies and may use sell side research reports
Provide: Reports tailored to investment strategies and clients
Availability: Not available publicly

Question 10

How are buy and sell side analysts compensated?

Answer 10

Sell Side: Soft dollars: indirect mechanisms - part of commission paid by investors to sales professionals when they buy securities, and then amount transferred to research department
Buy side: Fees are based on AUM

Question 11

What drove the need to separate research and IB?

Answer 11

• IBs had historically put pressure on research analysts to modify negative views on a company a company when banks were soliciting financing or M&A transaction

Question 12

What were the provisions of the 2003 Research Settlement?

Answer 12

1) Physical separation between research and IB professionals
2) Firms senior management must determine research budget, without input from IB department
3) Research analysts compensation, cannot be based directly or indirectly on IB revenue
4) IB’s can have no role on the company coverage decisions