Business, not regulation, is driving unbundling into Asia and Australia

Asset managers around the world are starting to unbundle and price research, even if new European rules don’t directly apply to them.* Clare Witts is the head of relationship management at ITG Asia Pacific.

All about the money

Requirements from MiFID II to price research and unbundle it from trading will have a significant impact across the industry globally, not just within the borders of Europe. But this is not a story about regulation; it’s a story about business. Starting in January 2018, the new rules will fundamentally change the commercial dynamic between the buy side and sell side in pricing and paying for research. Market forces are already pushing many firms to change their practices globally, including in Asia Pacific.


A new model for asset managers

Historically, research has been paid for using dealing commissions – often without a clear correlation between the research received and the amount paid for it via trading. MiFID II forces a break between the two; research now must stand alone and be priced in advance of consumption, with asset managers agreeing explicit research budgets with their investors.

A number of asset managers in Asia Pacific, particularly those with headquarters in Europe, are choosing to apply European rules across their global business. They are already negotiating with their brokers globally to price the research being provided to them.

Some of these managers are promoting the change as a differentiator to investors. Their message is that they are more transparent and taking better care of investors’ money because they are clearly pricing research and ensuring they aren’t spending on anything unnecessary.


Keep the client happy

These investors are then taking the conversation global, asking their other managers how their processes compare, or demanding reports on how much of their money is being spent on research. If you run a sovereign wealth fund in Asia, for example, and have invested with a European manager, that manager is now obliged to disclose not only the management fee they charge you, but also how much of your money they plan to spend on research to achieve expected returns. To effectively select or compare managers, it’s natural for you to now demand a comparable breakdown of information about research spending across all your existing or potential managers.

We are already seeing that search for equivalent transparency in Asia Pacific, with managers who are entirely unaffected by MiFID II themselves suddenly needing to break out how much they’re spending on research to a major investor who has asked. For a manager who is not set up to do so, or who is bundling their trading with research and has no idea how much they are actually paying for the research component, significant work is required to respond to client requests.


Pricing ‘sans frontières’

As research gets priced in Europe, those pricing models will spread to become de facto global models. While the sell side may resist for as long as possible, expect the effects and standardisation of research pricing in Asia Pacific to become clearer in late 2017 and through 2018. Early signs are there now: some global brokers are closing research business in non-core regions; many others are reviewing how their research can remain commercially viable in an environment where it has a fixed price.

In response, we’re already hearing about the sell side initiating far tougher conversations with the buy side than ever before to ensure managers are paying enough in the short term to justify the research service they receive, with far less patience in a longer term approach. A number of smaller APAC asset managers are already struggling to get serviced for research, and those discussions will only get tougher as the cross-subsidisation of research by trading fades globally.

However, the outlook for APAC research may be brighter than elsewhere. There’s been plenty of commentary in the U.S. and Europe about the commoditisation of sell-side research. But given the more disparate investment market here, real value is placed on good APAC research with a reliance on brokers and local providers for market intelligence that could not be replicated in-house. It’s likely that the Asia Pacific research market will therefore remain well supported by managers, but you will see a shift in who is producing it and how much is paid for it. Some interesting independent models have already jumped into this gap: Smartkarma, for example, provides independent Asia institutional research from more than 100 analysts on demand for a fixed monthly fee.

The push to change asset management practices in APAC is coming because of a fundamental change in the commercial environment. This is being driven across borders by competitive pressures between managers, by investors and – as research pricing conversations become the norm – by brokers. Asset managers here who aren’t prepared for the changes are likely to get a request from an existing investor they can’t respond to, miss out on attracting assets from a new investor or to be on the receiving end of a tougher-than-ever commercial conversation with their research brokers. Firms that are well prepared understand that change is coming, and they are already putting systems and processes in place that help budget research, report to investors and keep a close track of commission spending.

* The survey polled more than 100 buy-side professionals who participated in an ITG webinar on the impact of MiFID II regulations on North American asset managers. The buy-side firms that participated represent institutional investors with assets under management (AUM) ranging from approximately $125 million to more than $1 trillion, with average AUM of $47 billion.