Impact on Research for Investment Firms
The European securities and derivatives market is getting even more complicated as the new regulation MiFID II (Research Payment Account, RPA) goes live in January 2018. It seeks to increase investors protection and transparency. Investment firms will need to have in place systems to manage unbundled payments for execution and advisory services, develop numerous services that are categorized as research and pricing models for these services.
5 important things to know about Investment Researches right now as follows:
- Sell side firms (such as investment bankers and brokers) will have to disclose the associated costs and charges to buy-side firms in order for them to demonstrate that they are acting in their best interests and and have not been induced to trade. Sell side firms need to provide clients unbundled cost of trading, separately identifying and charging for execution, research and other advisory services.
- Sell side firms are required to review and identify services provided that could becategorized as research and therefore for which payment would be required. It no longer just applies to independent investment research but also applies to advisory services provided by Front Office Sales or Trading Personnel. This includes: materials or services that could inform an investment strategy, adding value to an investment decision; covers one or several financial instruments, issuers of financial instruments, assets or related market sectors; or provides a substantiated opinion as to the present or future value of the given asset, instrument or issuer.
- Buy side firms have to make explicit payments for research. Additional difficulties include how investment managers buying in this research prove its value to their clients to justify the fees paid.
- Early Morning Newsbriefs – that investors are receiving in their inboxes before sipping a cup of coffee and getting a brief overview of economy, previous day’s events, rates, currencies, central banks and economic numbers – are under the scope of research services unless they are only “short market updates” with a limited commentary or opinion.
- Quality and scope of research may decline: There is also a concern that the quality of research will decrease as its price becomes more transparent and therefore important. The drive to minimise costs is likely to result in a rationalisation of the research market, with fewer providers and fewer securities being covered. This could result in less efficient allocation of capital and reduced liquidity for securities issued by smaller cap companies.
It no longer just applies to independent investment research but also applies to advisory services provided by Front Office Sales or Trading Personnel.
Level playing field
Thinking critically, isn’t it a point of reading research to collect the most diverse range of views on a chosen subject. Furthermore, the morning newsletters were a great source for investors to get a quick glimpse what on the markets are going on.
In my opinion, the regulators forgot the fact the markets are globally interconnected so it will be a burden for European investment firms to compete with e.g. American ones as MiFID is not imposed in the USA.
In particular, EU fund managers that are subject to the AIFMD or the UCITS Directive are outside the scope of these proposals, while US investment managers are free to operate as they always did.
There is still an open question on how much banks might charge and the practice taking a shape is a two-tier pricing model. A full research (including meetings with an analyst and conference invitations) will be charged around 10k -20k € per year. Industry-wide, considerable amount of negotiations on the end fees paid are expected.
Barclays is set to charge clients as much as 350k £ for a full access for its analyst research and are the first to set out the packages such as gold, silver and bronze; with a gold deal offering unlimited access to reports and occasional meetings with analyst. The entry deal starts with 30k £.
The proposed costs of fixed income research are equally varied with Nomura and Credit Agricole demanding up to 120k $, Bloomberg reports, while JP Morgan has proposed 50k $ as a base fee.
In the UK, Woodford Investment Management, Jupiter and M&G are among the asset managers that have said they will absorb costs, while Schroders and Man Group plan to pass costs on to clients.
There is still a blurred line between marketing and research. A short market updates with a limited commentary will be free of charge.