REFILE-FEATURE-Which broker? The temptations of a fund manager

* Brokers allege inducements, nepotism

* Rumours of commission kickbacks

* Ski trips, prostitute among favours offered

* Fund managers silent on policies

(Corrects story date to April 1)

By Tom Bergin

LONDON, April 1 (Reuters) - Fund group Gartmore's GRTR.L suspension of a top hedge fund manager on suspicion of directing trades to favoured brokers shines a light on a murky business where tales of lavish hospitality, nepotism and kickbacks abound. On Tuesday, Gartmore said it had suspended Guillaume Rambourg pending the outcome of an internal investigation into whether he had breached internal procedures on directing trades.

The group’s shares fell 30 percent even though Gartmore said clients had not suffered losses. Details of Gartmore’s inquiry have not been revealed, but brokers and traders in the City of London financial district believe the way fund managers decide which brokers to use for share trades is wide open to abuse.

“I have seen some people using just one broker,” one trader said. “Some people are best mates, some people are receiving nice presents. People are human”.

Other brokers say the matter goes beyond favouritism.

“You see patterns that don’t make sense and you wonder ‘Are people getting the big trades in return for a kickback’. Of course, you can’t prove anything,” one sales trader at a U.S. firm said.

Fund managers remunerate their brokers through commission on trades. The obvious choice of broker for a buyer or a seller would be the one offering the best improvement on the price being quoted by a stock exchange.

However, it is more complicated than that.

By shopping around for best price, a big buyer or seller risks sending the price in the wrong direction, so to avoid that, traders often canvass only a handful of brokers.

In addition, brokers offer a range of services apart from deal execution, including research, meetings with the broker’s investment bankers and access to the management of companies with whom the broker has a close relationship.

This bundling of services makes it hard to determine which broker is offering the best service.

“It’s hard to say who deserves what but it often seems unfair,” said a broker with a European investment firm.


Around 20 percent of fund management institutions -- often hedge funds -- are responsible for 80 percent of commissions directed to brokers. So this elite is intensively courted for its business, said Charles Cronin, head of standards and integrity at the Chartered Financial Analyst Institute.

Ski trips, weekends in expensive hotels and hospitality to see the Monaco Grand Prix are regularly offered to brokerage clients, dealers said.

One trader said a broker took one of his rivals on a 10 day holiday in the Caribbean to watch the 2007 Cricket World Cup.

Nonetheless, Cronin said inducements had become less extreme and more “subtle” in recent years.

More subtle approaches can include sponsoring a fund manager on charity runs. A glance at sponsorship web site “” shows brokers pledging four-figure donations to the favoured causes of top fund managers.

Equity dealers believe there is even less oversight of the inducements offered to currency and commodity traders. They say this is because retail investors are seen as less likely to be directly hurt by any wrongdoing and the final client tends to be a major institution.

One oil broker said that on a visit to a client in Geneva in the late 1990s, his boss paid for a prostitute for the client.

In an effort to reduce abuses, some fund groups have devised systems to reward the brokerages which offer the best all-round service, rather than just friends of those who execute trades.

“Portfolio managers give ratings to individual analysts or salespeople and commission is then directed accordingly. It kind of takes the human element out of it,” another broker said.

Nonetheless, dealers say that in general, the allocation of commissions remains highly discretionary.

Gartmore said its execution only traders, not its fund managers, decide which brokers to use. Decisions are made on a “best execution basis” a spokeswoman said, although she could not say how this worked in practice.

Reuters asked 10 other hedge and mutual fund managers about their rules for deciding which brokers receive the highest commissions and how they ensure traders do not receive excessively generous inducements. All declined to give details.

An FSA spokesman said it had no rules guiding acceptance of hospitality or gifts.


The most serious allegations about the abuse of the commission system is that some brokers return part of the fee they receive to the fund managers who place the trades through them.

This suspicion is heightened when large volumes of trades go through small brokerages which offer little or no research and no banker or corporate access.

Such brokerages often pay their brokers a bigger percentage of fee income than larger investment houses do, reflecting their lower overheads.

However, no dealer could recall a single reported or prosecuted case of cash kickbacks and many others don’t think they occur at all.

And some think such allegations reflect sour grapes on the part of brokers who fail to make inroads with prospective clients.

“If you think about it, would these traders really risk their careers to take money from a broker? I can’t see it,” said the broker with a European investment bank.

There is no suggestion, from Gartmore or elsewhere, that Guillaume Rambourg engaged in any wrongdoing. Rambourg did not reply to attempts to contact him through his employer and acquaintances and via his facebook page, which has since been taken down.