Fund Managers Seen Cutting $300 Million on External ResearchBy
Greenwich survey assesses impact of EU rules starting January
U.S. firms with European units seen adopting global standards
Asset-managers in Europe and the U.S. will probably cut more than $300 million from research budgets in anticipation of regulations aimed at rooting out conflicts of interest in the market for investment information.
That’s according to a survey of 99 fund managers and traders conducted by consulting firm Greenwich Associates, which assessed the shake-up coming to the multi billion-dollar market for investment research over the next year.
The European Union’s MiFID II regulations, which require asset managers to separate trading commissions from investment-research payments, will have a “clearly negative” impact on the amount of commission money that is spent on research and advisory services, according to the Stamford, Connecticut-based firm’s findings released Tuesday. While the budget cuts will be “relatively modest” at individual asset-managers, research providers across the board fear the new law will prompt “a substantial decrease” in buy-side spending.
The findings equate to a 7 percent drop in overall commission spend for European institutions and a 5 percent drop for U.S. ones. Those reductions would contribute to a nearly $200 million decrease in U.S. research commission spend and a decrease of more than 100 million euros ($106 million) in Europe.
The MiFID II regulations, which take effect in January, seek to police conflicts of interest between managers and brokers and to keep managers from passing on the costs of research to their clients.
“The rationale behind the MiFID II directive acknowledges that when an asset manager uses their clients’ money to pay for research, they might not be a responsible buyer,” Greenwich said in the report. “Furthermore, the trading desk’s pursuit of best execution should not be influenced by the procurement of research.”
While the rules apply to the 28-nation bloc, U.S. asset managers with substantial business in the U.K. and Europe are also preparing for the changes and are choosing to adopt global standards. About 43 percent of U.S. respondents to the Greenwich survey plan to make global changes to their research practices, while the rest will wait to determine the effect of the EU regulations.
“Many are working to ensure the ripple effect from across the pond doesn’t turn into a tidal wave,” the report said.
More than half of U.S. survey participants and almost three quarters in Europe expect the rules to result in a slimming of their counterparty list for research and advisory services. And 40 percent of U.S. respondents and more than 50 percent of European ones expect to limit the number of brokers they trade with.
The spending cuts will hit global investment banks, with European asset-managers expecting a 7 percent drop in their use of research from banks. Bank analysts fretting for their jobs may have few prospects of moving in-house at fund companies.
“The harsh reality is that unless they are willing to invest heavily, buy-side firms will not be able to replicate the same access and consumption of research to which they are currently accustomed,” Greenwich said.
The survey also found that firms will be slow to switch how they pay for research. The law allows asset managers to pay for research either by hard payments from their own profits or losses, or through separate client research payment accounts, according to Greenwich. Most European managers said they expect over five years to pay for research primarily with hard payments, which would be a significant shift from current practice.
“This suggests that although MiFID II will allow managers to continue use of client commissions, European firms are hoping to move in the direction of hard payments,” Greenwich said.