MiFID II: One Year On
Assessing the Market for Investment Research
The survey findings presented in this report portray several drawbacks with the MiFID II regime for investment research. The findings suggest a competitive tilt favoring large firms as research budgets and profit margins come under pressure from client demands, increased competition, and business model disruption.
MiFID II: One Year OnView the Full Report (PDF)
In the months leading up to the introduction of MiFID II in January 2018, industry professionals observed a general trend toward firms opting to pay for research (charged against the firm’s profit and loss) as opposed to charging clients. This observation was corroborated in our 2017 survey data. One year on, these survey results affirm that trend. The clear majority of respondent’s firms pay for research, which holds true across all size categories in terms of assets under management.
Our findings show that asset managers are overwhelmingly absorbing research costs against their profit and loss and scaling back research budgets accordingly. The decline in research budgets increases with the size of the firm, and larger asset managers are more likely and able to move research production in-house as they scale back reliance on external providers.
Perhaps the most directly observable drawbacks are the perceived reduction in research quality and coverage, particularly for small- and mid-cap equities, which if sustained, could hurt liquidity and capital formation in that sector. The findings suggest that research provision is retrenching and focusing on the large-cap segment with fewer sell-side analysts employed.
On the positive side, however, investment professionals perceive the research marketplace to be more competitive overall, which perhaps reflects the extent of cost pressures and changes to research pricing, at least in the short run. Overcapacity in the supply of research is being removed, but it is an open question as to whether an equilibrium has been found that serves the best interests of end-investors.
CFA Institute conducted a survey of its European members between 6th and 19th December 2018. The survey was sent to a sample of 12,633 members in the European Union, the United Kingdom and Switzerland. In total, 496 responses were received, for a response rate of 4% and a margin of error of ±4.3%. Respondents came from 449 different firms across 25 different European countries.
The top 4 occupation categories represented are portfolio manager, research analyst, C-suite (Chief Executive Officer (CEO), Chief Financial Officer (CFO), Chief Investment Officer (CIO), and financial adviser/wealth manager. Collectively, these core investment management job functions account for 60% of respondents.
- Independent research providers have not benefitted from MiFID II, as a more competitive research marketplace drives a squeeze on research providers and fewer sell-side analysts; 57 per cent of buy-side respondents report sourcing less research from investment banks than before MiFID II.
- Research budgets have been scaled back, with the largest firms making the biggest budget reductions; the average decrease in research budget according to respondents is 6.3 percent. The reduction in budget, however, increases with firm size: for firms managing more than Euro 250 billion of assets, the average budget reduction is 11 per cent, whereas for firms managing less than Euro 1 billion assets, the budget change is negligible.
- Buy-side professionals mostly believe that research quality is unchanged, but sell-side respondents are generally more pessimistic, with 44 percent believing that research quality has decreased overall. Significantly, a relative majority of sell-side respondents –44 percent—believe research quality of small and mid-cap stocks has decreased. Less than 10 percent of respondents across both buy-side and sell-side believe research quality has increased.
- Survey respondents also express concerns over research coverage, with 47 per cent of buy-side respondents and 53 per cent of sell-side respondents reporting a decrease in coverage of small and mid-cap stocks.
- Sell-side respondents perceive there to be a reduction in analyst numbers, cited by 54 percent.
- Overall, however, respondents believe the research marketplace is more competitive, a view expressed by 39 percent, compared with 25 percent who believe the research market is less competitive.