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Money Management

Investors cutting research budgets post-MiFID – study

The European equity research market has shrunk by $300 million per year in the aftermath of new rules on the payments for investment research, shows a study by Greenwich Associates.

However, the full impact of the Markets in Financial Instruments Directive II, which took effect Jan. 3, will not be evident before the end of the year, the study stated. The new rules state that research payments must be made separate to trade execution.

For its "MiFID II is here: How investment managers have prepared" study, Greenwich Associates surveyed 88 institutional equity investors in Europe and the U.S. in the runup to the implementation of MiFID II. It found 39 Europe-based participants reduced their 2018 research/advisory budgets by 20% year-over-year. The firm estimated the 2017 research/advisory market to be $1.35 billion, with the 2018 market subsequently shrinking by almost $300 million.

Further, a growing number of U.S. money managers are following Europe's example, opting to pay for research themselves under MiFID II, found the report. Greenwich Associates interviewed 21 U.S. MiFID II-compliant institutions and 49 U.S. firms that will or do not need to be compliant.

The study said while the majority of U.S. money managers — and 64% of U.S. study respondents — do not fall under the MiFID II rules, a growing number are considering following suit. The study found only 9% of U.S. respondents are choosing to be MiFID II compliant, adding the "percentage could grow in the coming year."

However, Greenwich Associates said one-third of study respondents said they will pay research providers the same amount as last year. Further, the rules have led to investors cutting ties with some providers of research, with European respondents reporting more than a 20% decrease in research counterparties. However, the amount budgeted for each provider or broker will remain relatively flat year-over-year, added Greenwich Associates' study.

"Managers express concern about the message it would send to their investors if they made sudden and substantial cuts," said William Llamas, associate director of relationship management at Greenwich Associates, in a news release accompanying the study. "Any sign that managers have been wasteful in their spending in the past would resonate poorly."

The study is available for download on the Greenwich Associates website.