Each additional penny paid per share in brokerage commissions lowers a typical equity portfolios annual rate of return by about six basis points, according to new research by Ennis Knupp.
"A portfolio manager who pays an average of 3 cents per share more than is necessary for trade execution would add 20 basis points to the cost of portfolio management, said the study, written by Neeraj Baxi, consultant. "If the investment management fee is 40 basis points, this represents a 50% increase in the cost of investment management.
The study also criticizes commission recapture, a rebate of part of the commission back to the investor. "Commission recapture makes no economic sense, the study states.
The Ennis Knupp study is critical of soft-dollar practices, in which money managers "pay up for investment research and other services in commissions in excess of the cost of just executing trades. The firm advocates unbundling research and execution costs.