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Addressing MiFID Reforms on Investment Research

Posted by

Lynne Callister

on 20 Sep 2017

Addressing MiFID reforms on investment research

When MiFID II took effect on January 3rd 2018, it became increasingly clearer how firms plan on tackling the unbundling of investment research from execution fees.

Does this spell the end of the investment research analyst?

Under the investor protection framework within MiFID II, money managers will be required to pay for research separately from broking services, meaning that asset gatherers will need to decide who pays for the research that helps them make their own investment decisions.

Free MiFID II Training Presentation

How much does research cost?

Research costs can vary considerably. According to reports by Bloomberg, Bank of America plans to charge asset managers $80,000 per user, per year, while UBS Group AG will offer five users basic access for $40,000.

Some asset managers, including Baillie Gifford & Co, Woodford Investment Management Ltd, M&G Investments, Vanguard, and Jupiter Fund Management Plc, have confirmed they will pay for research out of profits.

According to the Financial Times, fund manager Hermes have said that they will put an end to charging clients for analyst research.

Meanwhile, a report by McKinsey & Co. predicts that when the new MiFID reforms take effect, there will be $1.2bn cuts in research spending and hundreds of job losses for research analysts.

Alliance Bernstein LP’s sell-side unit has quoted smaller firms about $150,000 a year for two or more fund managers to access analyst reports and other basic services, people familiar with the negotiations said.

Alliance BernsteinBloomberg

With this is mind, firms have two choices in relation to investment research:

  1. To make direct payments out of their own resources (which may or may not be reflected in higher fees to clients)
  2. To charge clients for research from separate Research Payment Accounts (RPA's), controlled by the firm

Whichever approach is favoured and whatever the reality, it's clear that all firms will be thinking much more about getting value-for-money and that all-important ROI after January 2018.

Best practice suggestions

If you intend asking clients to make contributions towards the cost of research via a separate Research Payment Account follow these steps.
    1. Familiarise yourself with company policies

      You must be certain that any charges, budgets, and the quality and extent of research is in line with company policy.
    2. Make appropriate disclosures to clients ex ante and ex post

      Firms must provide a breakdown of research charges and agree any changes in fees in advance with clients.
    3. Implement systems and controls

      To ensure any surplus is reimbursed to clients or offset against future charges.
      • Firms are not allowed to keep this surplus.
    4. Keep records of all payments

      Be sure to provide regular statements to clients.
    5. Document relevant evidence

      Remember, you must be able to demonstrate that research is in the clients' best interests and benefits them.

MiFID II Training Presentation

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