2017

MiFID II: A New Paradigm for Investment Research

Investor Perspectives on Research Costs and Procurement

Under MiFID II brokers will have to establish a price for investment research separately from execution services. This survey of CFA Institute members in Europe explores the impact buy-side professionals expect this will have.


MiFID II: A New Paradigm for Investment Research

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The provision of investment research is set to change dramatically in Europe. The revised Markets in Financial Instruments Directive (MiFID II), which came into effect on 3 January 2018, will deliver sweeping reforms to financial markets and business practices. It is set to disrupt the production and distribution of investment research. Under MiFID II, brokers will have to establish a price for investment research separately from execution services. The rules apply to all asset classes. Asset management firms will have to develop research budgets, and either pass the cost of research on to clients via pre-agreed research payment accounts or absorb the cost of research themselves (i.e., against the firm’s profit and loss). To help inform the current state of the market for investment research, CFA Institute conducted a survey of its European members in September 2017. The survey sought to understand the expectations of buy-side professionals regarding pricing of research for different asset classes, the allocation of costs, and other related issues.

Methodology

To evaluate the state of the market for research, CFA Institute conducted a survey of its European members in September 2017. The survey was sent to investment professionals working in relevant job functions.3 The survey was also sent to a sample of asset management firms, including C-suite contacts among the largest 400 asset managers in Europe. In total, 12,671 invitations were sent to members and external contacts, and 705 responses were received. Two screening questions were then applied to ensure that only investment professionals working on the buy-side and who are involved in using, producing, or procuring investment research were eligible to complete the survey. Following this screening process, a final set of up to 365 valid responses were received. The response rate was 2.9% and the margin of error ±4.5%. The respondents came from 330 firms and 28 different European countries.

Summary of Findings

  • 53% of respondents indicated that they expect their firm to absorb the cost of research, compared with only 15% who expect their firms to charge clients for research. A further 12% of respondents expected a mixed attribution (such as, for example, absorbing the cost of fixed income research but charging clients for equity research), whilst 21% were still unsure.
  • Sixty-seven percent of respondents with AUM greater than €250 billion expected their firms to absorb the cost of research; in comparison, only 42% of respondents from firms with less than €1 billion under management expected their firms to absorb research costs.
  • Investment banks are expected to lose out, with 78% of respondents expecting to source relatively less research from the sell-side. Investment management firms are likely to source more research in-house, a view expressed by 44% of respondents (a plurality). The impact on independent research providers and other third-party providers is expected to be more mixed, although around one-third of respondents still expect to source less research from both types of providers.
  • The survey next asked respondents about their views on the likelihood of explicit payment for research being adopted in other regions over the next five years. Excluding respondents who were unsure, 54% agreed that it is likely or very likely, whilst 45% thought it is unlikely or very unlikely.

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