Tuesday, March 14, 2017 Stamford, CT USA — Although MiFID II is being implemented by regulators in the European Union, it could change the way investors pay for equity research around the world. Such a global shift will have a profound impact on the businesses of bulge bracket brokerage firms and other research providers.
A new report from Greenwich Associates says large U.S. and U.K. asset managers with substantial business in Europe are choosing to adopt global practices adhering to MiFID rules to lessen the burden of maintaining distinct research management processes in different regions. “By adopting this strategy, these firms will be importing MiFID standards into the United States —despite the lack of a regulatory directive,” says William Llamas, Associate Director at Greenwich Associates and author of the new report MiFID II to Transform Investment Research Landscape.
The research provisions of MiFID II seek to separate or “unbundle” trading and research costs. Although it would be technically possible to do so, none of the U.S. firms participating in a recent Greenwich Associates study on the topic say they will implement two separate processes for the United States and Europe, citing the immense administrative burden and cost. Meanwhile, more than half of Europe-based asset managers predict that—as a result of the new rules—they will be paying for sell-side research primary with “hard dollars” within the next five years. “Taking on this expense would be a big hit to asset management P&Ls in a time where active management returns have suffered,” says William Llamas.
Research Providers Prepare for the New Investment Research Landscape
The greatest concern for research providers both large and small is that MiFID II will prompt a substantial decrease in buy-side research spend, which currently stands at $5.9 billion in the U.S. and €1.58 billion in Europe. Forty percent of institutions in the study overall and half of European institutions say MiFID II will result in a decrease in research budgets. This could contribute to a near $200 million decrease in U.S. research commission spend and over €100 million in Europe over the next 12 months, based on Greenwich Associates estimates.
European investment managers predict the new rules will trigger a 7% decrease in their use of global investment banks. Many investment managers in the study see a redundancy among the offerings of the large investment banks and may look to cut some coverage. Some midsize and regional brokers might explore exiting the equity trading business altogether if their current model consists mainly as using their trading desk as a “cash register” to collect payments for research. Meanwhile, 34% of asset managers in the study expect to increase their use of in-house research—although budget pressures will limit the ability of many firms to absorb the costs of hiring analysts.