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Dec 21, 2016

Investment houses plan to charge European clients extra research fee

Fund managers to charge a direct fee to investors to cover research costs

Some investment houses plan to charge European clients an extra fee for the research fund managers use to make investment decisions.

Many UK fund managers have said they will use their own money to pay for research used to run investment funds.

But a poll of 220 asset management executives across Europe finds that one in 10 fund managers say they will charge a direct fee to investors to cover any research costs, which is generally provided by investment banks.

A further 13 percent of fund managers plan to pay for research via a charge to their clients that is collected alongside transaction commissions.

Some fund managers fear their profit margins will come under pressure if they have to cover the cost of research themselves.

Under rules due to come into force in 2018, asset managers’ decades-long practice of lumping together the fees they pay investment banks and brokers for research and trading will come to an end.

Instead, asset managers in Europe will have to budget for the cost of research in advance and make it clear to clients what they are charged for.

The poll by RSRCHXchange, an online institutional research group, found that half of fund managers are still unsure how they will pay for analyst notes and other forms of research when Mifid II comes into force in 2018.

Jeremy Davies, co-founder of RSRCHXchange, says: ‘Asset managers will feel increasing pressure to find new methods and tools for addressing these issues.’

Joshua Maxey, managing director at Third Bridge, a research provider, says asset managers are reluctant to include research costs in their annual management charge in case it pushed up the fund’s total expense ratio (TER), which is used by investors to understand the costs of investing in a fund.

He says: ‘The reason that fund managers are uncertain about how they will pay for research is because no one wants to jump first and increasing your TER will make investment managers look less attractive to investors.’ 

Some are concerned that IR teams are primed to lose research coverage, as estimates say Mifid II could shrink the research industry by a third.