The new research regime

MiFID II has brought in sweeping changes to rules relating to investment research charges, and it’s becoming apparent that more clarity is needed
by Phil Thornton


As brokers, analysts, and fund managers trudged to work on Wednesday 3 January, they were aware that the date marked a bright new dawn for financial investment and trading in the form of the Markets in Financial Instruments Directive II (MiFID II).

To make the full cost of fund management clear to clients, the regulator, the European Securities and Markets Authority, has ruled that fund managers must account for research fees, and that banks and brokers can no longer wrap up the costs in their execution charges and send research for ‘free’. 

In other words, ‘free’ research that asset managers receive from brokers is now considered an ‘inducement to trade’. Managers that receive advice must assess its value and either pay for it or turn it away.

This reform has forced banks and other research providers to come up with a price for producing research that they had previously seen as a non-profit activity that was useful to support their overall strategy for selling stocks, bonds and commodity products. 

According to Vicky Sanders, co-founder of RSRCHXchange, an aggregator and marketplace for institutional research, four main models for charging have begun to emerge:

  • Platform-only: written research or platform access fee only; agreed upfront
  • Rate card: platform fee agreed upfront; incremental advisory services rate card agreed in advance; total payment determined by usage
  • Variable advisory model: large fee for full service agreed upfront; small ‘top-up’ proportion to be determined by votes by individual managers at the end of the quarter/period with the variable share often being 10%
  • Vote model: nominal fee paid upfront; majority of payment determined by vote at the end of the period where asset managers vote for the research that they found most valuable when making investment decisions.

Research budgets cutOne thing is clear: most fund managers plan to absorb the cost of research inside their profit and loss account rather than pass it on to clients. The CFA Institute conducted research in September 2017, summarised in a blog post, which finds that out of 359 of the largest European fund managers, 53% plan to absorb the costs; just 15% expect to charge clients; and the remainder are either ‘not sure’ or will be splitting the costs.  

The obligation to account for these charges has led fund managers to cut research budgets. According to Greenwich Associates, a US-based financial consultancy, US$1.35bn was used by European equity fund managers to acquire equity research in 2017. Its survey of 39 European managers shows they have slimmed those budgets for 2018 by 20%, equivalent to a cut of US$300m.
The price listMiFID II is likely to create a price list for different types of access above the basic access to read-only research. For example, banks may offer fund managers briefings by a bank’s, say, Asian economist, but will then set different prices for a face-to-face meeting in London, a conference call, or more specifically commissioned research on a stock or a sector. 

Large banks with universal coverage across sectors and regions should continue to find clients, especially if they are at the top of the rankings tables. However, banks and brokers that come lower down the tables may struggle to attract customers, says Vicky at RSRCHXchange.

Graham Bentley, managing director of asset management advisory gbi2, says large and mid-cap budgets are being slashed as funds use fewer external providers and more proprietary software and screening tools. However, he says specialist equities researchers will win out. “Knowing what few others know will be their unique selling point,” he says. 

Given that MiFID II has created a price for research that did not explicitly exist before, it may not be until later in the year that some fund managers see how much their premium research contracts are costing them. 

One response could be an increasing trend towards boosting in-house research. And according to ERIC’s European Asset Management Survey, 38% of buy-side firms are considering expanding their internal research teams. Specialist fund managers will need to buy in specific areas of research where there is not sufficient expertise in-house, says Vicky – for instance, an emerging market fund manager covering South Africa. 

Chris Turnbull, co-founder of Electronic Research Interchange (ERIC), a marketplace for research for regulated investment managers, is concerned that the low prices being charged for basic research are creating a danger that neither asset managers nor research providers are abiding by the essence of what MiFID II is trying to achieve. “The last thing we want is for an asset manager to be accused of being induced by paying too little for research,” he says. “There is a need for clarity and the only person who can bring that clarity is the regulator.” 

This article was first published in the Q2 2018 print edition of The Review. The print edition is available to all members who opt in to receive it, except student members. All eligible members who would like to receive future editions in the post should log in to MyCISI, click on My Account/Communications and set their preference to 'Yes'. 

Published: 18 Jul 2018
  • Compliance, Regulation & Risk
  • The Review
  • Regulation
  • Mifid II

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