Money management firms are grappling with a requirement under incoming rules that will change the way they access and pay for research.
The second iteration of the Markets in Financial Instruments Directive, a European regulation set to come into force Jan. 3, 2018, will reform the trading, reporting and research markets across European Economic Area countries. One of the most significant changes for money management firms is that they will have to separate research and execution payments.
Some firms have chosen to overhaul the way they use sell-side research altogether, altering their models so they take on the cost of this research themselves. Others have chosen to invest in expertise, bringing in-house teams of analysts and experts. And others said it is too early to speak to the topic, or declined to comment altogether.
Whichever route money management firms have chosen, regulatory demands have required these firms to scrutinize their own practices and the counterparties on whom they depend for research.
Sources said the issue is increasingly intense given the growing pressure on money managers and their costs.
“One of the long-standing conflicts in asset management is how research provided by banks and other sellers of bonds (or) equities is paid for and how much it should cost,” said John Bates, head of emerging markets corporate research, emerging markets fixed income at PineBridge Investments in London. “With the arrival of MiFID II we are going to see the sell side billing the buy side directly for research in all of its various forms. At the moment, the potential costs are starting to evolve and already the buy side is preparing for what could well be a major hit to their cost base.”
The regulation and its impact on money managers' margins was referenced by Martin Gilbert, CEO at Aberdeen Asset Management, speaking at the Pensions and Lifetime Savings Association's annual investment conference in March. He said money management firms are facing fee pressure and other headwinds, such as “higher regulatory costs, paying for our own research in (the) future.” Mr. Gilbert said Aberdeen already had announced it would pay for its own research rather than using client-dealing commissions. “That was because the (Financial Conduct Authority) said to me ... "you are using clients' money to pay for your research.' And I took the view at that point it was only going to go one way, and we may as well bite the bullet on that.”
And in a statement accompanying money manager Jupiter Asset Management Ltd.'s 2016 results, CEO Maarten Slendebroek said: “We will also take a consistent approach to the costs of research we use, by taking it all through Jupiter's accounts from 2018 with no change in the management fee, adding around £5 million ($6.2 million) of costs from 2018. During 2017, we will work with our service and research providers to implement these changes.”
While the changes are putting money managers under pressure, their clients might see benefits. Colin Pratt, investments manager at the £3.2 billion Leicestershire County Council Pension Fund, Leicester, England, said the unbundling of research “is potentially quite positive. There are signs that some managers will pay the research costs themselves, rather than pass them through to investors via commissions, and the downward pressure on fees caused by pooling (of local government pension schemes in England and Wales) means it is unlikely they will have the ability to increase their fees to offset the additional cost to them.” Overall, the regulation “may ultimately turn out to be more positive for the LGPS than it is negative,” assuming an easy fix can be found for a proposal to reclassify the pension funds as retail investors, said Mr. Pratt.