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Breakingviews: Don't bank on execution

Source: is Europe's leading financial commentary service.

Date: May 2003

In the space of seven days last month, the London offices of the bulge-bracket investment banks had to face up to the loss of two longstanding ways of bolstering income from equity trading. One was imposed by the regulator. The other was surrendered voluntarily by Goldman Sachs and Merrill Lynch in what looks like a big bet on the way the brokerage industry will evolve.

At the beginning of April, Goldman and Merrill effectively loosened the ties between stockbrokers and fund managers. They agreed to let asset manager Gartmore redirect part of its commission payments to rival stockbrokers. This will allow Gartmore to execute share trades through Goldman and Merrill but reward rival brokerages for investment ideas. Other banks are proposing similar deals to their clients, too, abolishing a decades-old charging structure that forced investors to pay for various products and services when they wanted share trading only.

Days later, the UK's Financial Services Authority further loosened the grip that brokers have on their fund management relationships. The regulator wants fund managers to refund commission to clients if the charges relate to services other than executing share trades.