European institutional investors plan to cut spending on equity research by 1% in the next 12 months — in contrast to the 6% to 7% projections a year previous — ahead of new research payment unbundling rules, shows research by Greenwich Associates.
The Markets in Financial Instruments Directive II, which comes into effect Jan. 3, will require all financial firms doing business in the European Union to separate out their payments for research from execution. The new framework will see money managers and other institutional investors forced to pay for research either from their own balance sheets or through research payment accounts.
Greenwich interviewed 164 buy-side equity traders and 198 portfolio managers in Europe about their plans for equity research budgeting and payments for the coming year.
Across the group, a 1% reduction is planned for overall equity research spending, to include both commission-based soft payments and hard payments from money managers' own profit and loss statement. In research last year, Greenwich Associates found investors planned to reduce spending by 6% to 7%.
"Our research shows that the seismic disruptions that many expected probably won't materialize in the early months of 2018," said William Llamas, associate director and relationship manager at Greenwich Associates. "Immediate, substantial decreases will indicate to regulators and clients alike that these managers were wasteful in their research spending in prior years."
The research, which was conducted in the second quarter of this year, also showed that about 1 in 10 buy-side participants said they plan to shift all research payments to hard dollars from their own profit and loss statement in the next year. "While other institutions have already decided to fund research payments with RPA-based payments, about two-thirds of study participants had not yet decided how they will pay for research under the new MiFID guidelines," Mr. Llamas added.