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Nov 21, 2017

Firms to absorb the cost of investment research under Mifid II

CFA Institute research reveals only 15 percent of firms expect to charge clients

In the latest Mifid II trends research, the CFA Institute, the global association of investment professionals, has revealed that most firms expect to absorb the cost of investment research, while only 15 percent expect to charge clients.

The CFA Institute’s survey of its European members was undertaken to understand the expectations of buy-side professionals regarding pricing of research for different asset classes, the allocation of costs and related issues. 

The results have been published in Mifid II: A new paradigm for investment research, which also notes concerns that new regulation will adversely affect smaller firms and reduce competition, and finds that a majority of respondents expect to source less research from investment banks.

Rhodri Preece, head of capital markets policy for the EMEA region at the CFA Institute and author of the report, comments in a statement accompanying the report: ‘CFA Institute supports the objectives of these reforms, which are to remove potential conflicts of interest between asset managers and their clients when transacting with brokers, and to deliver a more transparent, competitive and efficient market for research. 

‘But the rules are not a panacea. Some respondents were concerned about unintended consequences, including a decrease in the availability of research and a reduction in research coverage.’

As Mifid II comes into effect on January 3, 2018, one of the most significant aspects for investment managers and brokers is the requirement to establish a price for investment research and charge for it separately from execution services across all asset classes. 

In terms of the expected annual cost of research under Mifid II, the survey revealed a wide range of responses, reflecting both the diversity of investment strategies pursued and uncertainty over pricing, with negotiations ongoing. 

The median value of the annual expected cost of equity research was 10 basis points. This equates to €1 mn ($1.17 mn) per annum on a notional €1 bn assets under management (AUM). 

The cost of fixed-income, currencies and commodities research was lower, costing approximately half as much as equity research at approximately €350,000 per annum on a notional €1 bn AUM.

With regard to the allocation of research costs, 21 percent of respondents were unsure about how they expected their firm to cover most of the cost of investment research: 53 percent of respondents indicated that they expect firms to absorb the cost compared to 15 percent who expect their firms to charge clients for the research. Twelve percent of respondents expect a mixed attribution.

The proportion of respondents anticipating that their firm will absorb the cost of research directly corresponds to the size of AUM.

Sixty-seven percent of respondents with AUM higher than €250 bn expect their firm to carry the cost, whereas only 42 percent of respondents from firms with less than €1 bn AUM expect their firm to absorb research costs. 

Respondents raised concerns over a possible competitive disadvantage for smaller firms, echoing industry fears that the changes could result in the loss of some small businesses and further industry consolidation in favor of major global organizations.

Mifid II is also expected to have an impact on research providers, with 78 percent of respondents indicating that they expect to source less research from investment banks under the new regulations, while 44 percent of respondents expect to bring relatively more research in-house.