As you may already know, MiFID II is just around the corner and some firms are already well on their way to compliance, however others remain either oblivious, unprepared or facing the many challenges in establishing steps towards compliance. Here Fabrice Bouland, CEO of Alphametry, explains for Finance Monthly what some of these challenges may be and what lies ahead for firms, in particular dealing with the different approaches regulators are taking in respect to the implementation of investment research unbundling.
On 3rd January 2018, new EU legislation comes into practice, part of which stipulates that investment research will have to be paid for separately. This marks an end to the historic model whereby much of it has appeared to be provided free of charge, or at least bundled in with other costs such as trading commission. Firms are now in a scrabble to the finish line as they put new processes in place and make decisions about how research will be sourced and paid for. Few, if any, are fully MiFID II-compliant and ready for January’s deadline. Yet as the clock ticks down, and daily stories emerge from buy and sell-side firms announcing their research pricing and budgeting plans, one fundamental question is often overlooked – how are asset managers and analysts determining the value of their research to ensure maximum value is generated from whatever approach they have decided upon.
Many asset managers have said they will be footing the bill for external research out of their own pockets. Most recently, BlackRock has joined the growing queue of firms which have decided to take this approach. Its announcement was quickly followed by a number of firms, including Schroders, Janus Henderson Investors, Union Investment and Invesco, backtracking on earlier decisions to pass research costs on to investors – all have now said they will be absorbing the costs themselves. Of course, bearing the cost internally will be much harder for smaller and mid-tier firms, many of which will have to reduce the volume and breadth of external research they have access too.
When it comes to pricing, we’ve seen some eye-wateringly high figures. Barclays outlined a system of tiered packages, starting at £30,000 for a ‘read only’ subscription to European research, rising to £350,000 for its ‘Gold’ package. The larger investment banks will, of course, charge more than their smaller rivals. Canaccord Genuity Group’s sell side unit in the UK released a figure of £75,000 a year for full access to the firm’s investment research and analysts, including dedicated sales and analyst calls and customised research requests. Similarly Alliance Bernstein LP’s is quoting firms around $150,000 a year for access to equity analyst reports and other services.
So what’s missing in this brief overview of the market and regulatory landscape? Better evaluation of research must undoubtedly play a role in how firms consume research in an unbundled world, especially for smaller managers with reduced budgets. Technology has a key role to play in accurately assessing and pricing investment research, as well as demonstrating full transparency in order to meet regulatory requirements. In many ways, this is a market crying out for innovation given that only 1% of research notes sent out are read by the buy-side, according to Quinlan & Associates.
In a digital, data-reliant world, traditional voting systems for research are slow and inaccurate. Evaluation must be bottom-up and data driven if firms are going to establish where reduced budgets need to be focused, and which providers deliver the best ROI. New research platform generation provide an opportunity for managers to better understand what they consume, as well as helping providers hone in on providing the most valuable and relevant content. There now exists a huge opportunity for asset managers to integrate innovative knowledge management solutions so that research can be targeted directly into the heart of firms’ investment process, giving them the best data from global sources, as well as supporting budgeting and payment decisions in a more detailed way
Clearly, there remains a lot to do over the next four months, and into 2018, to ensure firms are ready and compliant with MiFID II. The price discovery process continues to be very painful, not to mention the challenges asset managers face deciphering the varying nuances and interpretations of the legislation by different regulators, and how MiFID II will work globally.