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RESEARCH UNBUNDLING IS A MAJOR CONCERN FOR ASSET MANAGERS

European Asset Management Survey reveals 74% likely to overhaul sources of research 

Research conducted by Electronic Research Interchange (ERIC), the open marketplace for buying and selling high quality investment research, reveals over 70% of asset managers will be re-examining their sources of research under MiFID II. The findings from its European Asset Management Survey suggest that while financial institutions anticipate a significant overhaul in investment research provision, they do not have a clear idea of the scale or scope the changes.

  • 74% will apply greater scrutiny to sources of research from January 2018
  • 74% of asset managers forsee a reduction in investment bank research
  • 38% of asset managers are considering expanding internal research teams
  • One year out, 38% are not confident of being prepared for MiFID II unbundling; 42% are not confident of their obligations

The survey, administered over the fourth quarter of 2016, found that both the buy and sell-side anticipate the need to adapt to a world in which research fees are transparently reported and unbundled from trade execution fees. However, the questions of how their businesses will be affected, and how they will adapt, remain unanswered with just under a year to go until MiFID II implementation  on 3 January 2018.

Support for MiFID II, but uncertainty over outcomes

Asset managers broadly agree that the aims of MiFID II unbundling rules are virtuous. Over 7 in 10 (74%) believe that the buy-side should bear the cost of research. Whether the new rules will positively impact the end investor, as anticipated by the regulator, is still open for debate: only 40% of managers expect that greater research fee transparency will provide a demonstrable benefit for clients.

The survey finds that a large proportion of the buy-side are under-prepared for MiFID II unbundling rules; 38% are not confident of being ready and, even more worryingly, 42% are not even entirely sure of their obligations.

The way forward

There is a widespread acknowledgement that the industry will require a new model to ensure that the production of research remains viable. There is uncertainty around the idea that investment banks will be able to continue distributing the same volume of research a year from now. Under MiFID II, 74% of respondents foresee a reduction in investment bank research.

The need for research will remain consistent, so with less provision from the sell-side, asset managers acknowledge the requirement for new sources and distribution models. Over a third- 38% – of the buy-side are considering expanding their internal research teams. At the same time, the buy-side is generally resistant to the idea of spending more money on research. A quarter – 25% – of respondents believe that research spending will increase, while the remaining 75% predict that spending will either remain the same or even fall.

An alternative solution

This raises the question: how will asset managers be able to access the variety and quality of research they need should sell-side distribution decline, without spending more money? The answer, it seems, is a “third way”: 57% of respondents highlighted the rise of alternative research distribution platforms as the answer, through which asset managers will be able to access specific and targeted pieces of research for a clear fee.

Chris Turnbull, co-founder of ERIC, says: “MiFID II will significantly change the investment industry but the consumption of quality research will remain a critically important element of the investment process.

“Our findings show that asset managers expect that relationships across the industry will be deeply affected under the new regulatory regime. While we believe that investment banks will continue to play a critical role in the provision of quality research, it is clear than both the buy and sell side  must adapt to new research procurement and distribution strategies in order to avoid getting caught out in January 2018 and continue serving the best interests of the end investor.

“MiFID II has kick-started a drive for transparency that will recognise the value of high quality research, but there is still significant work to be done to meet regulatory obligations and ensure the investment research market functions effectively in an unbundled world.”

The survey was deployed during Q4 2016. 91 respondents were surveyed online, with respondents from the buy side, sell side and analysts, wealth managers and custodians across the United Kingdom and Europe. The purpose of the survey was to identify the challenges faced in the run up to MiFID II implementation and uncover issues around the production and distribution of research.