An Oliver Wyman report into research unbundling, a key tenet of Mifid II, stated the average investment manager expected to reduce research spending by between 10-30% from January 2018 onwards.
However, some managers said they could see spending drop by 50% which could ultimately lead to a $1.5bn revenue loss for banks providing research, the loss doubling to $3bn in the worst case scenario if a full price war broke out.
The report’s author Michael Turner, said: “With $1.5bn in potential lost revenues and a new jockeying for position across banks and independents, research providers are entering a critical phase.”
Global revenues from research totals $5bn a year, Turner’s research found.
He added the rules could be a ‘game-changer’ for independent research providers by levelling the playing field against larger banks but said: “We have started to see signs of a price war emerging as research providers compete to retain clients.
“Investment managers will balance the trade-offs between cost, quality and complexity.”
Cost of research unbundling
For investment managers, the key issue remains over whether to absorb costs or pass them on to clients.
Taking on the cost of research marked a 2–4% increase in operating costs for asset managers, and a 4–7% fall in revenue.
The impact would fall heaviest on small and medium-sized businesses, where the cost of absorbing research expenses would prove “disproportionately burdensome” according to Turner.
In an era of cost cutting the increased burden is an “unpalatable prospect”, but the report added it could be simpler for firms to absorb the cost rather than enter the operational difficulty of justifying the cost of research if they chose to pass the expense on to clients.
Preparing for Mifid II
Turner added: “With many operational steps to be worked through and uncertainty about how far and how fast the change will run, few will make bold strategic moves before 2018.
“Yet with the environment likely to evolve rapidly, executives would be wise to prepare a playbook and think through a range of strategic options.”
