Turnbull, who co-founded Eric alongside fellow former Standard Life Investment director Russell Napier, delivered the word of caution on Tuesday, predicting that “a number of firms” are in for a rude awakening about the size of their research bill and traditional methods they have used to work it out.
Mifid II rules require that investment managers “unbundle” the cost of research, meaning they must decide whether to pay for external research from their own profit & loss or pass on the costs directly to clients.
Nearly every asset manager has decided to absorb the costs themselves, with firms like Europe’s largest fund house Amundi and Fidelity making a u-turn on their original decisions to let clients foot the bill.
However, Turnbull noted that before the regulation came into full effect on 3 January this year, “many did the minimum necessary to comply with new unbundling rules” in order to meet the deadline.
“This bare bones approach didn’t give asset managers much time to assess the research they should be consuming and what it should cost,” he said.
“As the first quarter of life under Mifid II ends, a number of firms are about discover they owe more for research than they have anticipated and are not paying for it in the way the FCA intended.”
Shock to the system
Among the nasty surprises awaiting fund groups, Turnbull thinks the first quarter research bill will come as a “shock” to firms unaware of the full costs associated with broker interactions previously taken for granted.
Pre-Mifid II, fund groups and brokers enjoyed a cosy, symbiotic arrangement wherein investment banks and brokers offered managers “free” research in exchange for carrying out trades.
Though some asset managers have negotiated a basic price for written research moving forward, this “basic access” might not include everything firms think like conversations with bank analysts had in the first quarter, said Turnbull.
“Premium research takes many forms, of which time with top analysts is just one,” said Turnbull. “Invoice shock may catch managers unaware as they slowly wake up to the true price of broker insight.”
Similarly, managers might not be fully aware of how traditional practices, including deciding research payments, are at odds with the current rules.
Historically, many fund groups have had broker voting systems in place to determine who gets paid what for research consumed. But Turnbull said this ex post approach to payments “is in direct conflict with the spirit of Mifid II”, which calls for ex ante research payments.
Ultimately, “regulatory intervention may be required”, he speculated.
Mifid II will also put an end to limited broker research trials, something which managers might be unaware of. The FCA previously permitted investors to three-month trials of broker research content, allowing firms to explore the full options of content providers.
Trial and error
However, having a full quarter’s worth of data should give fund groups a clearer idea of future costs and should reveal “the content they can’t live without”, said Turnbull.
This early into the transition process will involve a great deal of trial and error for all parties involved, he stressed.
“Arguments may arise around the fees due for research services. In some circumstances asset managers will need to re-evaluate how much they pay for research, which could reignite previous discussions over who should bear the costs. Three months on we may finally see the action that Mifid II has, to date, failed to inspire.”
