Scope Analysis and Frost Consulting have launched a Research Process Rating Service to allow asset managers to demonstrate to clients that their investment processes have successfully adapted to the MiFID II environment.
MiFID II is transforming the investment research ecosystem, with significant implications for fund investors globally.
Abrupt changes to the long-established research procurement regime have introduced an unprecedented series of information asymmetries. Asset managers that are unable or unwilling to explain how their research processes have adapted to the MiFID II environment represent an unquantifiable risk for investors.
The changes wrought by MiFID II will have a profound impact on long-established investment processes, potentially creating an unprecedented dispersion of performance winners and losers. The ability for managers to sustain and maintain their investment process in the face of new regulation will be a key determinant of future success.
However, the widespread move to pay for research via P&L in Europe might reduce the research spending transparency that European regulators aimed to achieve. For investors, this introduces uncertainty at best; significant performance risk at worst.
The research operating environment has changed significantly but fund investors have no easy means to understand the implications for the investment/research process for their current or prospective investments. In the MiFID II environment, the burden of proof that the agreed investment process is still intact lies squarely with the asset manager – particularly if they are funding research via P&L.
MiFID II considers the receipt of research by asset managers in the absence of a contractual relationship as an inducement. This fundamentally changes the information flow for asset managers. PMs and analysts at asset managers are used to calling any analyst at any research producer at any time to seek information – and to reward them retrospectively. Post MiFID II, in many cases, compliance departments at asset managers may forbid any contact with research providers with whom there is not a contract in place.
The manager’s real-time need for new (and impossible to anticipate) information, based on volatile market conditions, does not easily align with the new regulation. MiFID II’s contractual requirements for research ended the previous laissez-faire system in which most managers had access to most (investment bank) research services on demand (without any pre-agreement) – and at prices they could afford.
For further details, see full report
Scope Analysis and Frost Consulting will publish soon the methodology for Research Process Ratings