Manager research budgets fall after MiFID II implementation

The research budget of money managers operating in Europe shrunk 6.3% on average after the implementation of the Markets in Financial Instruments Directive II at the start of 2018, according to a survey by the CFA Institute.

A survey of 496 portfolio managers, analysts and other professionals from 449 different firms, 43.2% of which were money management firms, found that research budgets fell 8% for firms across the European Union following the introduction of MiFID II rules. By comparison, an average research budget of firms operating in the U.K. fell 6.8%. The MiFID II rules required investors to unbundle trading fees and research costs, alleviating potential conflicts of interest between investment managers and their clients when transacting with brokers.

Conducted Dec. 6 to Dec. 19, the survey also showed that for firms with assets under management between €1 billion ($1.1 billion) and €20 billion, the resources devoted to paying for research fell 5.6%, while for mangers with AMM between €20 billion and €250 billion, the drop was around 7.6%.

However, for firms with AUM of more than €250 billion, their research budgets decreased 11% on average.

"MiFID II has brought transparency and competition to the investment research business. But as asset managers have absorbed research costs, we have seen a notable reduction in research budgets that is causing a shakeout among research providers," Rhodri Preece, head of industry research at CFA Institute, said in a news release.

Research coverage has also declined, according to buy-side firms participating in the survey. The largest decline was recorded for small- and midcap equity research, said 47% of respondents.

Less than one-third of respondents said large-cap equity and fixed-income research coverage declined since the implementation of MiFID II. Almost a third of respondents, or 27%, said overall research quality has also declined. Some 26% of the respondents said specifically small- and midcap equity research quality declined and 22% said large-cap equity research quality has deteriorated.

Since the introduction of MiFID II, 30% of respondents said small- and midcap equity research cost increased and 26% said large-cap equity research increased.