Last month in London, FactSet hosted a roundtable event on The Challenges of Research Unbundling under MiFID II. During the event, 20 professionals representing 15 UK-based global buy-side firms participated in an engaging dialogue. One focus on the conversation was the provision of research payments.
Under MiFID II, investment firms will no longer be able to accept research for “free.” Firms will pay either for research directly (aka P&L method), charge clients alongside a transaction through an RPA (aka transactional method), or employ an accrual method through use of an RPA (aka accounting method). Based on the roundtable conversation, the transactional method appeared to be a clear favorite among participants. However, attendees also pointed out that it is likely that the P&L method will prevail across the industry after several years.
To explore their opinions further, we conducted an anonymous survey of attendees to gather emergent consensus views on research payment and inducement topics. Despite the relatively small sampling group (which may distort the outright percentage breakdowns), there were still a number of interesting takeaways.
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Here is a look at the results:
How do you anticipate future buy-side research costs will change under MiFID II?
While they may appear evenly split, just over 40% of attendees expect an increase of costs (and a similar percentage expect a decrease of costs) either small or large, while only 10% expect future costs to remain unchanged. Looking at it another way, over 60% of respondents expect future research costs to remain relatively unchanged with either a small increase or decrease.
Perhaps most compelling, either perspective demonstrates a lack of clear consensus on whether costs will increase or decrease, or by how much, potentially illustrating a broader sense of confusion surrounding MiFID II.
Projecting two years forward, how do you expect research analyst employment in London to change?
Regarding buy-side research analyst resources, 65% expect future buy-side research resources to increase by a small or large margin, while approximately 35% expect a small decrease.
A clear consensus emerged regarding future sell-side research analyst resources; over 80% of the group felt future sell-side resources would decrease with 60% expecting a significant decrease.
The overwhelming consensus view indicates a significant shifting of research analyst resources away from the sell-side to the buy-side or potentially to independent research boutiques. Our discussion also raised the potential for a consolidation of sell-side research analyst resources to the very largest investment banks with dominant franchises.
How do you anticipate paying for research under MiFID II?
Paying for research proved to be an interesting topic. Initially, most participants expected to pay for research under MiFID II using the transactional CSA/RPA method; charging a client’s commission sharing agreement, which funds a research purchase account, on a per transaction basis. This represents the least drastic change from the current “pre-MiFID II” approach. Roughly 25% anticipate utilizing the P&L method through cash payments from the firm’s income statement. The remaining 25% were undecided.
None of the respondents anticipated using the accounting method (also known as Swedish Model), where a fixed charge is applied to each fund, perhaps on a daily accrual basis, rather than funded with transactions, where funds are transferred to the RPA and then ultimately paid to the research provider.
Surprisingly, a unique forward-looking consensus view emerged as the discussion unfolded. Several roundtable participants opined that the P&L method would prevail across the industry over time, perhaps after several years. This established an unforeseen majority group view. As one participant summarized, investors have always paid for research and they will continue to pay for research in the future. MiFID II will provide more transparency into the ROI of research resources consumed. The P&L method may present the buy-side with a cleaner way to eliminate the non-essentials, while potentially better equipping them to negotiate costs with the sell-side providers of research products and services.
Article by Fran Reed, FactSet