European fund groups to absorb Mifid research costs

More than half (53%) of European investment professionals expect firms to absorb the cost of research under Mifid II regulations, according to a survey by the CFA Institute.

The MiFID II: A New Paradigm for Investment Research report revealed that 21% were unsure of how their firm plans to cover the cost, 15% expect their firms to charge clients and 12% said costs should be split evenly between the firm and clients.

However, the report noted a direct correlation between respondents who anticipate their firm to absorb the costs and the firm’s assets under management (AUM). More than half (67%) of respondents at companies with more than €250bn (£222bn) expect their firm to carry the cost, compared to 42% from firms with less than €1bn AUM.

According to the report, this has raised concerns that the Mifid II regulation will adversely affect smaller firms.

Speaking at a press briefing today, Rhodri Preece, head of capital markets policy EMEA, CFA Institute, and author of the report, explained that an argument already exists for an “insufficient focus on small company’s research” and it echoes industry fears that the changes could result in the loss of small companies.

He said: “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 competitive disadvantage for smaller asset managers.

“In other words, larger firms are more able to absorb the costs of research by taking a hit to their profit loss 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 a 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.”

Meanwhile, Mifid II is also expected to have an impact on research providers, with 78% of respondents indicating that they expect to source less research from investment banks. In addition, 44% said they expect to bring relatively more research in-house.

The report stated that the median value of the annual expected cost of equity research was 10 basis points, equating to €1m per annum on a notional €1bn AUM.

Yet, the cost of fixed income, currencies and commodities (FICC) research was predicted to be lower, costing approximately half as much as for equity research at approximately €350,000 per annum on a notional €1bn AUM.

Preece added: “CFA Institute supports the objectives of these reforms, which are to remove potential conflicts of interest between asset managers and their clients when transacting with brokers, and to deliver a more transparent, competitive and efficient market for research.”

The survey asked respondents from 330 firms and 28 different European countries in September 2017.

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