The study found that investment managers' rating of their broker's operational performance fell "significantly" in 2005.

Z/Yen says increasing volumes and the transfer of processing to offshore locations as a cost reduction strategy by brokers have impacted service levels.

The vast majority - 80% - of the 49 investment managers surveyed now say that operational performance has an influence in business allocation. Of these, a quarter say that good or excellent performance will increase the amount of business given to a broker.

As price spreads continue to narrow, investment managers are looking at other differentiators to support their choice of broker, particularly service levels. But the study found that many brokers are not dealing with issues such as fragmented organisational structures, inaccurate or late trade confirmations and staff turnover.

Jeremy Smith, director of financial services at Z/Yen, says OTC derivatives are becoming a key part of investment manager's strategies and they are demanding a higher standard of service from their brokers: "Brokers need to ensure that their client facing processes have the sufficient levels of investment to meet this demand."

Z/Yen says some brokers have already responded to the higher demands by establishing well resourced client management teams for high value customers.

The research also found that investment managers have invested heavily in technology, with over 50% now using, or planning to use Swapswire and DTCC over the next 12 to 24 months. Outsourcing of operations processing is also increasing, with just under a third of respondents (29%) outsourcing all or part of their operations.