With the long-feared Mifid II regulation hurtling towards the industry, firms have less than seven months to get their houses in order.
The new rules are shining a light on the $20bn investment research industry, demanding research be priced, monitored, quality assessed, billed and reported. But the industry is currently a sprawling mess, with research relationships between the sellside and buyside spread over thousands of daily emails, analyst meetings and individual calls.
Firms will need to make series of tough decisions in order to prepare themselves for research unbundling. Here are the five main ones:
1) To charge or not to charge clients
Asset managers must choose how to pay for the external research they use to make investment decisions. There are two options: one, pay for research out of their own pocket (i.e. a cost on their P&L) or two, pass the cost onto their clients through an identifiable charge – such as by using a Research Payment Account structure.
Earlier this year we saw a flurry of announcements saying firms were paying for research themselves. The buyside was either encountering pressure from clients or attempting to avoid the hugely onerous operational complexities associated with an RPA. More recently we have seen a few bucking this trend and even some creative hybrid models taking shape.
2) Choose niche or broad
In a Mifid II priced research world, the buyside will not be able to afford to pay their legacy lists of hundreds of research providers. Buyside firms are evaluating their current research relationships and culling some of their more expendable providers. We’re seeing buyside firms with lists of more 400 research providers being cut to less than 100, with a greater focus on quality and cost being the underlying reason. Though there are numerous permutations, we are seeing a trend towards an allocation in budgets toward more specialised niche research versus the traditional broker waterfront service.
A study by Quinlan & Associates, a strategy consultancy, predicts a “decline in global research spend of up to 25-30% by 2020”. With budgeting coming under new disciplines and regulators hunting for possible inducements, some of even the strongest sellside research firms could be in for a tough time.
3) Overarching or selective pricing
One of the biggest frustrations for the buyside is the struggle to receive constructive pricing models from the sellside. Tough discussions are currently taking place between sellside firms and their top-tier clients on negotiating costs for ‘waterfront coverage’ packages (an ‘all you can eat’ access to research).
However, adopting such pricing structures could be a double-edged sword for sellside institutions, which risk losing their mid-to-smaller client accounts that cannot afford the hefty fees for research and don’t have the negotiating power.
Macquarie investment bank has become one of the first investment banks to go public on its subscription pricing with optionality to purchase additional services, including direct access to their analysts through their Macquarie Dimensions platform.
4) Human or technological monitoring of ‘unsolicited’ research
A major implication of Mifid II is the inadvertent receipt of research from brokers where no formal research relationship exists. This is considered an ‘inducement to trade’ and will fall foul of the regulators.
How do you put into practice measures to monitor and track thousands of daily research emails and hundreds of analyst calls and meetings? How do asset managers block the receipt of research that isn’t paid for?
Compliance teams can’t be everywhere at once, so technology solutions might need to be embraced to help the buyside ensure the firm is run properly.
5) Treat international clients the same or differently
If you think that Mifid II is only going to impact Europe then think again. Mifid II research unbundling rules seemingly conflict with the US regulator and global asset managers are realising the Mifid II impact on their business practices as they might struggle to justify treating clients fairly in different jurisdictions. But most US asset managers do not want to run multiple regulatory systems because the risks are too high.
Emma Margetts is co-founder of Alpha Exchange