Whither Unbundled Research Budgets?

Shanny Basar

The majority of fund managers expect their research budgets to remain the same or increase after new regulations next year although half have still not decided how they will pay for their consumption.

RSRCHXchange, the online aggregator and marketplace for institutional research, surveyed asset managers on their readiness for MiFID II. From January next year European regulators will require asset managers to either pay for research from their own revenues or set up research accounts for clients with agreed budgets. Regulators want to increase transparency and separate the costs of trading and research which have historically been combined in one commission.

The survey was conducted towards the end of last year by polling company Survation, and respondents came from more than 200 firms with a total of $15 trillion of assets under management.

The study found that 42% of respondents expect their firm’s research budget to remain the same in the next two years while 26% expect budgets to increase. However payments will shift as only 13% of respondents expect to pay for research from all nine biggest banks. Nearly three-quarters, 72%, expect to use research from less than five banks.

In addition, half of respondents are still undecided on how they will pay for research under MiFID II.

Jeremy Davies, co-founder of RSRCHXchange, told Markets Media: “People are still deciding how to pay for research as there can still be technical difficulties around collection and execution. For firms with a few funds it is easier, but if they have hundreds of products it is more difficult to allocate the research payments.”

As a result 38% of those who have decided on how to pay for research said they would use their own revenues, rather than asking end investors to pay. For example, last year UK fund manager Woodford said it would pay for research itself while larger rival Legal and General Investment Management gave each of its active equity funds a defined research budget.

“Ultimately the decision is also down to the end investors who have to set a research budget,” added Davies.

Last year, for example, financial technology provider Fidessa and Commcise, a provider of cloud-based commission management technology, launched a service to allow fund managers to fund research payment accounts using commission sharing arrangements. Once the trade has been executed the buyside can add a separate research charge for research so the decision is made post-trade, rather than on the traditional pre-trade basis.

Although MiFID II only applies to the European  Union, in the survey 86% of US funds anticipated that the research unbundling will eventually impact them. Davies said: “Global firms on our platform have said they would like to have one system across the board.”

The survey also found that written research is the most valued and most frequently consumed of the research services. RSRCHXchange has signed up more than 1,000 asset management firms and around 185 research providers posting notes and subscription content.

Davies said: “The landscape of institutional research is shifting and asset managers are reviewing and adjusting their working practices to keep pace. Some of the results of this survey will come as a surprise to the industry, especially the decline in research spend with the big banks.”

A report from consultancy Greenwich Associates estimated that traditional active investors in Europe generated roughly $3.44bn in institutional cash equity commissions for the 12 months ended quarter two 2016, an 8.5% decline from the prior year and only half of peak levels in 2008. In addition, larger institutions cut their research provider lists from an average of just over 28 to roughly 24.

The report said: “The traditional bundled model of compensating brokers for research resulted in a relatively high correlation for most major brokers between their standing in the “research vote” and their share of execution business. There is little question that this relationship between research share and execution share is weakening and will continue to do so.”

The consultancy also expects a dramatic shift away from commissions and toward hard payments.

“Such a shift away from commission-based payments implies that institutions will either take these costs on to their own P&L, or pass charges along to clients in the form of an incremental fee,” added Greenwich. “With active management fees already under pressure and the growing popularity of passive and quantitative strategies, it’s fair to ask whether these expectations will actually come to pass.”

Greenwich Associates interviewed 197 European equity portfolio managers and 178 European equity traders between March and May 2016.

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