Investment managers expect to pay an average of 10 basis points for research formerly paid for out of their customers’ funds when Mifid II comes into effect on January 3, 2018.
A survey of European fund managers conducted by CFA Institute found a wide range of anticipated cost in complying with the new rules, which outlaw the current practice of bundling research in with brokerage costs and paying for it out of client account, on the basis it is a transaction cost. The divergence in anticipated cost reflects the diversity of investment strategies pursued and uncertainty over pricing as negotiations are ongoing.
Corporate Adviser has been highlighting the lack of transparency surrounding the practice of using bundled research costs since 2012.
Under the current rules there is no requirement that the charge levied for research actually relates to the stocks being bought by the asset manager. Investment managers and brokers will in future be required to establish a price for investment research and charge for it separately from execution services across all asset classes.
The CFA Institute research found the median value of the annual expected cost of equity research was 10 basis points, with the cost of fixed income, currencies and commodities (FICC) research nearer to 3.5 basis points.
The research found 53 per cent respondents expect firms to absorb cost of investment research, with only 15 per cent expecting to charge clients and 21 per cent unsure about how they expected their firm to cover most of the cost of investment research. Twelve per cent of respondents expect a mixed attribution.
The proportion of respondents anticipating their firm to absorb the cost of research directly corresponds to the size of assets under management. Sixty-seven per cent of respondents with assets under management (AUM) higher than €250 billion expect their firm to carry the cost, whereas only 42 per cent of respondents from firms with less than €1 billion AUM expect their firm to absorb research costs. Respondents raised concerns over a possible competitive disadvantage for smaller firms, echoing industry fears that the changes could result in the loss of some small businesses and further industry consolidation in favour of major global organisations.
MiFID II is also expected to have an impact on research providers, with 78 per cent of respondents indicating that they expect to source less research from investment banks under MiFID II, while 44 per cent expecting to bring relatively more research in-house.
Some asset managers expressed concerns that the new regulations will adversely affect smaller firms and reduce competition, and the majority of respondents expect to source less research from investment banks.
Respondents include investment professionals, including C-suite contacts among the largest 400 asset managers in Europe. CFA Institute, the global association of investment professionals, conducted its survey in September 2017.
CFA Institute head of capital markets policy EMEA and report author Rhodri Preece says: “CFA Institute supports the objectives of these reforms, which are to remove potential conflicts of interest between asset managers and their clients when transacting with brokers, and to deliver a more transparent, competitive and efficient market for research. But the rules are not a panacea. Some respondents were concerned about unintended consequences, including a decrease in the availability of research and a reduction in research coverage.”
