As regulatory changes are set to slash the research market, asset managers are set to see a swathe of new initiatives with independent research providers, new products and competition for top analysts as MiFID II comes into effect.
Asset managers could spend up to £750 million less each year on research in the UK following the implementation of MiFID II, according industry statistics and experts.
The UK’s Financial Conduct Authority (FCA) estimates that UK investment managers pay £3 billion of dealing commissions per year to brokers, of which £1.5 billion was spent on research.
MiFID II proposals on unbundling investment research from dealing commissions will profoundly change the way asset managers not only consume, but pay for research.
The FCA estimates that as a result of unbundling of research from trading commissions under MiFID II, the total spend by asset managers on research will halve.
These estimates go even further than those produced following research by The Trade and Markit in 2015.
A Trade and Markit survey of over 120 buy- and sell-side professionals found that 35% expect research commissions to fall by 10%-20%. A further 29% expected an even larger decline in research commissions, between 20%-50%.
These figures alongside previous estimates on the effects of unbundling suggest the research industry could decline by at least £300 million per year, following the introduction of MiFID II, but the FCA believes the impact could be far larger.
It has been suggested that smaller asset managers seeking research will be hit hardest when MiFID II comes into effects.
Small managers to struggle
A report from the New City Initiative published last summer claimed: “An outright ban on the cost of research being passed on to investors would clearly favour larger asset management companies – especially those that can afford their own in-house research services.”
“Smaller firms tend to be heavily reliant on external research, and would find it a lot more difficult to face this extra cost. A number of smaller managers may even be forced out of the market.”
The Trade spoke to the founders of independent financial research company, ResearchPool, James Woodley and Pedro Fernandes about the issues asset managers face in obtaining and consuming research.
Woodley explained: “The market anticipates a 50% drop in size of the research market. Banks and brokers, both large and small, need to decide what research to focus on, whether that be universal coverage or specialist research, so it’s likely we will see a rise in poaching of analysts and research teams.”
He added: “This focus on specialisation and expertise creates a more level playing field and therefore opportunity for independent research providers.”
The way asset managers consume and obtain research will be turned upside down amid MiFID II regulatory changes, but the debate surrounds whether asset managers are in fact scaling back on research.
Woodley explained the difficulties in the way asset managers consume research and how a scale back in research is inevitable.
He said: “Some large financial institutions can have up to 250 research providers, providing masses of research which simply cannot be consumed and quality control becomes an issue.
“It has been debated for a long time whether institutions are in fact scaling back on research as budgets are slashed and MiFID II implementation approaches.
“Every asset manager has a different opinion on this, but eventually a scale back in research will happen.”
A survey by TABB Group, published in March last year, spoke with over 50 asset managers trading European equities and managing a total of $25 trillion in funds about the consequences of research and execution unbundling.
The report found that 67% of participants believe research payments will decline, corroborating other surveys.
Unbundling research has, however, opened up market competition from bespoke research providers like ResearchPool, with TABB Group’s report revealing 35% of UK firms anticipate a flight to quality research.
Jeremy Davies, co-founder of RSRCHXchange, a platform set up to enable asset managers to source independent research, believes these specialist providers will gain market share post-MiFID II.
He said: “While it’s difficult to predict exactly how overall research spending will evolve in the short term, we feel very strongly that independents – those who already produce quality research, price that research, and engage fund managers on the cost of research – will gain market share long term.”