Will MiFID II RPAs Survive ?
The announcement by BlackRock, the world’s larger asset manager, that it will absorb payments for research has led to a debate over whether this will be expected by all asset owners and remove the need for research payment accounts.
MiFID II, the regulations coming into force in the European Union at the start of next year, requires fund managers to either pay for research themselves from their P&L or to use a research payment account, where the budget has been agreed with the client. Asset managers can designate a third party to administer the RPA on their behalf but still have to track their consumption of research and assess its quality.
Rebecca Healey, head of market structure at institutional trading network Liquidnet, tweeted:
— Rebecca Healey (@_RebeccaHealey) September 14, 2017
Valerie Bogard, analyst at consultancy Tabb Group, said:
And is this what the European regulators were ultimately looking to do? All research paid for from P&L. I think so
— Valerie Bogard (@valerie_bogard) September 14, 2017
Alex Green, founder of consultancy Adirondac Group, agreed:
In time, all asset owners will come to expect this from their investment managers.
— Alex Green (@agthreesixty) September 14, 2017
Richard Johnson, vice president, market structure, and technology at at consultancy Greenwich Associates, questioned how long RPAs will survive:
Indeed. The RPA regime is temporary construct… question is how much time? 2yrs for Europe, 5yrs for US?
— Richard Johnson (@_richjohnson) September 14, 2017
Consultancy Oliver Wyman said in a report this week, Research Unbundling: Revealing Quality and Forcing Changes, that research costs only make up an average 1-3 basis points of the total charges of active managers. “Yet absorbing these charges could add 2-4% to operating costs for asset managers, equivalent to a 4–7% profit reduction. This is an unpalatable prospect in an environment where many fund managers are under pressure to cut costs,” added the report.
Michael Turner, partner at Oliver Wyman, told Markets Media that a growing number of larger fund managers are choosing to absorb research costs to avoid the operational complexity of operating an RPA. More importantly, they want to get ahead of the regulatory pressure to pass on fewer costs directly to clients and the competitive pressure from cheaper passive funds. However, the burden of absorbing research costs will be too much for smaller asset managers and he expects them to continue to use RPAs.
“Many asset managers are still undecided but recent announcements are adding to the pressure to absorb costs,” said Turner. “Some firms could also use different approaches for different funds and regions.”
For example, the US requires asset managers to use client money to pay for research. However, Turner said the US Securities and Exchange Commission has issued guidance that it will not punish firms for complying with the MiFID II unbundling requirements.
Sandy Bragg, principal at consultancy Integrity Research Associates, said in an email to Markets Media: “The tide appears to be turning against charging European asset owners for research costs under MiFID II, but one thing that the UK media seems to be overlooking is that US-based asset managers like BlackRock and JP Morgan are ring-fencing European assets for research payments. Given that paying for research with client assets is ensconced in US law, it remains to be seen if this will be a global phenomenon.”
Gerard Walsh at Northern Trust Capital Markets said in an email to Markets Media: “The move to pay from P&L doesn’t necessarily alter the need for RPAs, but it does alter the way in which money collects in the pot to make those payments to providers. There’s going to be quite a bit of disruptive adjustment as MiFID II rolls through implementation.”
Walsh continued that as result of this disruption, structures created in advance of the implementation of MiFID II may fall away through time, including RPAs.
In June Walsh told Markets Media that some think there is too much capacity in research and unbundling will force an assessment of the value added to the investment process. Walsh said: “To add a lot of value, research will have to include different ways of thinking and more unique, challenging and non-consensual ideas.”
He continued that although overall research capacity might decrease, more specialised boutiques will also be set up.
Oliver Wyman estimated that the total amount of research consumed in Europe costs $5bn and there will be a reduction of between $1.5bn and $3bn. However, some fund managers expect little change while others plan to cut spending by half. Many expect to focus spend on a core of group of four to six global research suppliers and a long tail of select specialists, which opens up opportunities for boutiques.
The consultancy’s report said unbundling is making many investment managers review the size and role of their internal research teams.
“Pressure to justify the value of external and internal research should encourage investment managers to explore advanced digital techniques and more systematically analyse the way information is used to drive better long-term investment strategies,” said Oliver Wyman. “Irrespective of who pays for research, those who optimise research consumption and invest in technology to better incorporate research into alpha generation can at least partially outweigh the incremental cost of research or return drag.”
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