Research unbundling crosses the Atlantic as US asset managers embrace change

TABB Group report finds large US equity asset managers are increasingly turning to research unbundling for cost savings and focus on best execution.

Research unbundling under MiFID II is becoming increasingly popular among large US equities asset managers, according to a new report from consultancy TABB Group.

In its latest research as part of a broader study titled “US Institutional Equity Trading 2019 Unbundling: How Charging for Content Is Reshaping Asset Management”, TABB highlighted the trend and how buy-side firms were turning to unbundling for cost savings and transparency.

TABB Group interviewed 92 head traders at US-based institutional buy-side firms and found that only 33% of large firms are still bundling research and execution payments.

In comparison, 45% of mid-sized and 67% of smaller funds have retained a bundled approach, and 43% of those interviewed stated that research unbundling has had a positive impact on their business.

“While we don’t believe that the ability to acquire investment research will be an existential threat to the fund management business,” said report co-author and founder of TABB Group, Larry Tabb, “unbundling will dramatically change how investment research is procured, funded and serviced as it reshapes the character and capabilities of not only the US asset management industry, but its brokers and service providers as well.”

Under the MiFID II regime implemented across the European capital markets at thef start of last year, payments for execution and research from third-parties must be separated, or unbundled, although no such ruling has been formally implemented in other global regions.

Despite this, US asset managers have been increasingly adopting the European model over the last 18 months, with 90% of those on the buy-side that were interviewed saying that the Securities and Exchange Commission (SEC) should extend its no-action letter on paying for research with hard dollars, or enable “more leeway in paying hard dollars to brokers for their research”.

Those surveyed by TABB Group also highlighted benefits such as greater clarity around research requirements and the ability for traders to focus on best execution instead of allocating trades to research brokers based on their ideas. Larger asset managers area also seeking to implement a more globally-consistent approach when it comes to paying for research.

“While unbundling helps larger funds, not all have embraced it,” commented report co-author, Campbell Peters, equities research analyst at TABB Group. “Mid- and smaller-size firms with fewer AuM and less substantial commission wallets now have to pick their providers, negotiate a value for their chosen research provider and hope they have a large enough budget to fund their investment strategies.”

Earlier this year, The TRADE undertook a close examination of how the European markets had adapted to research unbundling under MiFID II.