MiFID II sees $300 million decline of equity research industry

Study finds a reduction in equity research budgets across Europe and the UK under MiFID II has already caused a decline in the market

The market for European equity research has already seen a decline of $300 million in the wake of MiFID II’s rules on unbundling payments for investment research and execution fees.

A recent study by Greenwich Associates found research and advisory budgets were reduced on average by 20% year-on-year, causing nearly $300 million to be wiped off its estimated $1.35 billion value. 

It also found firms in Continental Europe made more severe cuts, slashing equity research budgets by 32%, whereas firms in the UK were more restrained and reduced budgets by 17%. 

The study explained the disparity is likely due to UK investors being more prepared for MiFID II and the result of country’s regulator, the Financial Conduct Authority (FCA), being a strong proponent of unbundling requirements. 

Despite a decline in research budgets overall, the study also found a significant percentage of managers’ equity research budgets will remain unchanged from 2017, with one-third of respondents stating they will pay research providers the same amount as last year.

“Managers express concern about the message it would send to their investors if they made sudden and substantial cuts. Any sign that managers have been wasteful in their spending in the past would resonate poorly,” said associate director of relationship management at Greenwich Associates and author of the report, William Llamas. 

Moreover, as a number of institutions have recently confirmed plans to absorb the costs of research MiFID II, 40% of European firms said they have chosen this strategy while 34% will instead continue to use client commissions to pay for research. 

In a similar study carried out in the second quarter last year, just 9% of firms indicated they were planning to absorb the costs of research through P&L, although as the dust has settled and MiFID II has come into force, manager-funded research models have become the most prominent. 

Greenwich Associates’ study concluded that despite the $300 million decline in the European equity research market, the ultimate impact of MiFID II will not be evident until the end of this year.