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Asset managers to slash sell-side research after MiFID II, survey shows
November 20, 2017 / 3:20 PM / 23 days ago

Asset managers to slash sell-side research after MiFID II, survey shows

LONDON (Reuters) - Asset managers will source significantly less research from banks and brokers after MiFID II is implemented, the CFA Institute, a London-based industry body of investment professionals, found in a survey launched on Monday.

A wide-ranging regulatory change coming on Jan. 3, the Markets in Financial Instruments Directive II requires providers and consumers of investment research to account for it separately from execution services for the first time.

In effect, producers have to determine a price charged to consumers of research. That has sparked negotiations over the value asset managers assign to different forms of research.

The change is intended to remove potential conflicts of interest between asset managers and their customers on the buy side, in which consuming research by banks and brokers - the sell side - could be seen as an inducement to trade with them.

Of the asset managers surveyed, 78 percent said the regulation would lead them to consume less research from large investment banks. Only 2 percent planned to get more research from them.

Meanwhile, buy-side firms expected to bolster their in-house research capabilities, with 44 percent saying they would source more research in-house.

This represents “a significant shift from the sell side to the buy side in terms of where research is procured from,” said Rhodri Preece, head of capital markets policy for EMEA at the CFA Institute.

“It might suggest asset managers feel they can control their cost base better by producing more research instead of paying for it,” he said.

The survey, conducted at the end of September, covered 330 firms in 28 European countries.

SMALLER FIRMS PASS COSTS ON TO CLIENTS

The willingness and ability to absorb research costs rather than passing them on to clients was largely determined by size.

Larger firms were more likely to absorb research costs, with 67 percent of those with more than 250 billion euros ($295 billion) of assets under management saying the firm would pay.

That compares with 42 percent of firms with less than 1 billion euros under management. Some 22 percent of those smaller firms expected clients to pay for research. Only 9 percent of the largest firms were passing on costs to clients.

The degree of uncertainty was also greater among the smaller firms. A quarter said they were not sure whether the cost would be absorbed or passed on to clients.

SOME RESEARCH TO COST MORE

The price of research remains a contentious and nebulous area with less than six weeks to go until the new rules are implemented.

Respondents were asked to estimate the annual cost of research for different asset classes in basis points on assets under management rather than absolute figures.

For equities, the median expected cost of equity research at 10 basis points - equating to 1 million euros per year for a firm with 1 billion euros under management.

The range of responses was wide, from 5 to 20 basis points, probably caused by uncertainty over pricing and the variety of equity investment strategies.

The median cost for fixed income, currencies and commodities research was much lower, at 3.5 basis points.

That might be caused by a perception in the market that such research is free, because until now it has been bundled into the dealing spread, Preece said.

Those assets are also driven by macroeconomics more than equities, leaving fewer opportunities for original, conviction ideas that would command a premium.

What asset managers valued most in research also differed depending on their size.

The firms with more than 250 billion euros under management attributed 40 percent of the cost of research to analyst access, twice the value smaller firms saw in it.

Gary Baker, managing director for EMEA at the CFA Institute, said bigger firms were likely to allocate more of their budget to calls with analysts, but highlighted the uncertainty about how pricing would be determined. “You are trying to bottle and sell conviction,” he said.

COSTS RISING

Some 69 percent of asset managers focused on fixed income said they expect costs to increase, while just 29 percent of the equities-focused houses saw costs rising. Nearly 50 percent of the latter expected costs to decrease.

Preece said fixed income managers may see higher costs because dealing spreads are likely to remain the same and they will have to pay for research on top of that.

Asked whether total costs for research and execution services would increase as a result of MiFID II, 49 percent of the smaller firms said they expected costs to increase; 49 percent of the larger firms saw costs decreasing.

“That speaks to the perception that perhaps there’s more bargaining power the bigger you are as a firm,” Preece said. “There’s a feeling that the rules are likely to create a competitive disadvantage for smaller asset managers.”

In written comments, asset managers mostly disapproved of the regulation. “Increases cost” and “poor outcome for clients or investors” were among the remarks recurring most often. “Not good for small companies or asset managers” was another widespread complaint.

“The exact effect won’t be known for some time,” Baker said. “The overall quality of research will improve, but it’s going to take time and it’s going to be painful.”

($1 = 0.8487 euros)

Reporting by Helen Reid

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