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AMs seek inexpensive research solution to MiFID II

The research capabilities of both the buy and sell side will change as the January 2018 MiFID II deadline approahces

Over 70% of asset managers will be re-examining their sources of research under MiFID II, as the January 2018 MiFID II deadline approaches, according to new survey by Electronic Research Interchange (ERIC).

ERIC’s European Asset Management Survey suggests that while financial institutions anticipate a significant overhaul in investment research provision, they do not have a clear idea of the scale of scope of the changes.

74% of asset managers will apply greater scrutiny to sources of research from January 2018, with the same percentage foreseeing a reduction in investment bank research.

38% of buy-side firms are considering expanding their internal research teams. At the same time, the buy-side is generally resistant to the idea of spending more money on research. A quarter of respondents believe that research spending will increase, while the remaining 75% predict that spending will either remain the same or even fall.

In a similar survey conducted by RSRCHXchange, 65% of respondents expected the top nine investment banks to constitute less than 60% of their future research spend, as reported by Global Investor on 13 January. Just 13% expect to pay for research from all nine of the largest banks and 72% expected to use research from five or fewer banks.

Pre-MIFID II investment banks can bundle research notes and other services, such as access to analysts, with execution costs so they do not usually attract an explicit fee. Post-MiFID II research must be unbundled and charged for separately.

The ERIC survey, carried out in the fourth quarter of 2016, found that both the buy and sell side anticipate the need to adapt to a world in which research fees are transparently reported and unbundled from trade execution fees. But the questions of how their businesses will be affected and how they will adapt remain unanswered with just under a year to go until the MiFID II implementation on 3 January 2018.

74% of asset managers surveyed by ERIC agree with the impending MiFID II rules, believing that the buy side should bear the cost of research. But only 40% of managers expect that this greater research fee transparency will have a positive impact on clients.

One year out, ERIC found that 38% of asset managers are not confident of being prepared for MiFID II unbundling. Even more worryingly, 42% are not even entirely sure of their obligations.

Research platforms

The new survey from ERIC raises the question of how asset managers will be able to access the variety and quality of research they need, should sell-side distribution decline, without them investing it their own research capability. 

There is a “third way” of utilising research platforms, according to ERIC, itself a UK-based marketplace for research for regulated institutional investors. It has a similar business model to RSRCHXchange.

ERIC says 57% of respondents to its survey highlighted the rise of alternative research distribution platforms, through which asset managers will be able to access specific and targeted pieces of research for a clear fee.

“MiFID II has kick-started a drive for transparency that will recognise the value of high quality research, but there is still significant work to be done to meet regulatory obligations and ensure the investment research market functions effectively in an unbundled world,” said Chris Turnbull, co-founder of ERIC.

This content is provided by Euromoney Seminars for informational purposes only, and it reflects the market and industry conditions and presenter’s opinions and affiliations available at the time of the presentation.