Mifid II regulation: Writing a blank cheque?

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Many asset managers have opted to pay for research under Mifid II, but exactly what those costs will be is still unclear.

As the summer draws to a close, asset managers are coming under increasing pressure to reveal their investment research strategy under the EU’s Markets in Financial Instruments Directive II (Mifid II). The new rules are due to come into effect on January 3 and the level of disquiet on the buy side over the lack of preparation is growing by the day. 

Research aggregator RSRCHXchange spoke to 562 respondents from over 450 asset managers in June. Around 85% said that they would not be compliant with Mifid II before the fourth quarter of this year and 34% said that they had still not decided how they were going to pay for research. 

The key decision that needs to be made is whether asset managers will absorb the costs of research themselves or pass them on to clients. 

Research

In recent weeks, however, it seems that a growing number of firms are finally jumping off the fence. And, interestingly, many of them are opting for the side that costs them more money. 

Of the large firms Vanguard broke cover first, stating in early August that it would cover the cost of research itself. The move was significant as some consultants had previously calculated that such a decision could cost Vanguard as much as $100 million. However, the Pennsylvania-based firm has declared that paying for research will dent its P&L by a mere $5 million.

Later in the month JPMorgan Asset Management also confirmed that it will pay for research, joining a growing roster of firms that includes Pimco, M&G Investments, T Rowe Price, Woodford Investment Management, Hermes, Northern Trust and many others. A far smaller number are opting to pass costs on to clients – among them Schroders, Man Group and Amundi. 

Costs

Recent research conducted by the Financial Times identified 24 firms that will pay for research and just six that will definitely pass costs on. However, 19 firms it spoke to remained undecided and six declined to answer – a group that included Goldman Sachs and Morgan Stanley Asset Management. 

It seems extraordinary that just four months before Mifid II is due to come into effect the costs associated with research are still so unclear. There is quite a difference between $100 million and $5 million. The large investment banks have reportedly been talking about a charge of $1 million a year for an annual research subscription while smaller firms seem to be asking for between $100,000 and $500,000. 

Investors clearly value the research that investment banks produce; they now need to figure out how to pay for it as a matter of urgency.