Have You Done Your Research on Research Costs?
MiFID II requires investment firms to demonstrate compliance with a wide range of new measures, building on the original MiFID from 2007.
Given that the deadline was pushed back a year from 2017 to 2018, the regulators are unlikely to accept the usual excuses about the lack of time.
Amongst the MiFID II requirements is one that could well be a game changer for investment managers, banks and research firms alike. It's the requirement for research costs to be unbundled from those associated with the execution of trades.
Before MiFID II, investment firms were able to factor the costs of providing research into the commissions payable to brokers, which meant that the investors were bearing the costs of the provision of this research to the fund managers.
MiFID II has changed this landscape, by requiring fund managers wishing to obtain research to either pay for it out of their own pockets (effectively from their profit and loss accounts) or by setting up specific research payment accounts funded by the clients.
Shifting shapes on research costs
The latter option theoretically is not too different from the current arrangements, as the client continues to pay for the research, but just in a more transparent and regimented way.
However, if a fund manager decides it wishes to shoulder the cost of obtaining research itself, then this could have a significant impact on the business models, and could eat into profit margins substantially.
Some managers have decided to take the hit and bear the cost, whilst others will want to put in place suitable agreements with their clients.
Whichever route is taken, there's a lot of work for investment firms of all sizes to do, in order to put their research houses in order.
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