The CFA Institute survey among European investment professionals, most of whom work for asset managers, found that the proportion of respondents anticipating their firm to absorb the cost of research directly corresponds to the size of their company’s assets under management.
Two thirds of respondents with assets under management (AUM) higher than €250bn expect their firm to absorb research costs, whereas only 42% of respondents from companies with less than €1bn AUM expect their firm to foot research bills on behalf of clients. Respondents from small companies also tend to believe Mifid II will lead to an increase in aggregate costs for research and execution, while those representing the largest asset managers think overall costs will be lower.
“Competitive disadvantage” for smaller managers
“Throughout the results we’re seeing quite a difference in how respondents are answering the questions depending on their firm size. There is a feeling that the rules are likely to create a competitive disadvantage for smaller asset managers,” said Rhodri Preece, head of capital markets policy for EMEA at the CFA Institute, speaking at a press briefing today.
“In other words, larger firms are more able to absorb the costs of research by taking a hit to their profits and not having to pass those costs through to clients, but it is much harder for smaller firms to do that, so I think there will be competitive pressure,” he added.
“Whether Mifid II will exacerbate that problem or will it [present] opportunities in the market for new research providers to come in, is something we will have to wait and see.”
Buy-side impact
The Mifid II requirement to pay for research separately will not only impact asset managers, but also banks and wealth managers. After all, they also receive research reports from investment banks, and will have to start paying separately for this service from January next year.
Alvaro Martin Sauto, head of funds-of-funds at Bankia, a Spanish bank with €22bn in AUM, says his firm will opt for a mixed attribution of costs. “We will absorb about 40% of the costs, but will pass the rest on to our clients,” he says.
Meanwhile, Bankia also plans to buy less research and reduce the number of providers it uses.
“We plan to focus on what we value most, and cut costs that way. We are now in the middle of conversations with our research providers, and they realise they have to lower the cost of research [to retain clients],” says Sauto.
Overall, with 78% of respondents to the CFA survey indicate they expect to source less research from investment banks. In addition, 44% said they expect to bring relatively more research in-house.
In terms of the expected annual cost of research under MiFID II, the survey revealed a wide range of responses, reflecting both the diversity of investment strategies pursued and uncertainty over pricing with negotiations ongoing. The median value of the annual expected cost of equity research was 10 basis points. The median cost of fixed income research was lower, at only 3.5 basis points.
