Money managers are grappling with the new realities of their relationships with brokers and access to investment research, as the dust settles over implementation of trading rules in Europe.
The Markets in Financial Instruments Directive II came into force Jan. 3, bringing with it a raft of new transparency requirements.
One of the most onerous rules for money managers is the mandatory separation of payments for trade execution and investment research. Firms spent much of last year deciding first how to split out the payments, and then whether to absorb the cost of obtaining research from brokers and banks or pass the fees on to clients.
Many money managers decided to pay the cost themselves, with a number of firms reporting the impact of MiFID II research payments in their half-year updates ended June 30. Janus Henderson Group PLC reported a $19 million estimated MiFID II research cost for 2018. Man Group in its half-year update acknowledged unspecified "cost increases from MiFID II," but in its full-year 2017 report it said ongoing costs associated with MiFID II would add about $10 million to $15 million to the firm's cost base starting in 2018.
Now some money managers are reflecting on the decisions they made and the ongoing impact of the rules, leading them in some cases to overhaul the way they work with their providers.
"It puts into question how managers use research and the quality of this research," said Luba Nikulina, global head of manager research at Willis Towers Watson PLC in London. "When you have research wrapped into overall costs of execution and doing business, you take it as a free data point and calibrate it with everything else in your own research. The overall feeling in the market is that the level of third-party investment research has reduced or moved elsewhere outside of Europe, but not that there's a significant challenge for the asset management industry because they are now missing this additional data point. At the moment it is a bit of a readjustment, with the industry that provides research trying to figure out its new business model and price discovery for their value-add in the investment process, and I think it is quite healthy for the industry," she said.