In March 2017, the Investment Association launched a public consultation on the standardisation of disclosure for charges and transaction costs. The consultation sets out an industry code, a blueprint for the reporting of charges and transaction costs using a consistent approach across the market and in line with regulatory requirements.
“We set out a blueprint for the reporting of charges and transaction costs that aims to provide a new framework for use across the market, as well as presenting an opportunity for industry practise and regulation to work together so investors are able to access information that is consistent and comparable,” said the Association.
The charges imposed for research have been contentious as financial regulators seek to create greater transparency in the financial markets and improve investor protection. In the UK, the Financial Conduct Authority in March said a majority of asset managers were “falling short” of providing value for money for clients when it came to research and trading charges.
In 2018, the European Union’s Mifid II will unbundle execution and research fees, requiring asset managers either to pay for research themselves or to charge clients a fixed research budget, not linked to the value traded. Asset managers must set aside a budget for research, which should be substantive and seen to help with investment decisions. Additionally, an audit trail for third-party research consumed by the buy-side will be required.
The changes that will be brought about by Mifid II should intensify competition, creating a buyer’s market. Independent research providers are expected to benefit from a more level playing field.
There are still issues to be resolved, including finding the best way to value research and how to place an intrinsic value on third-party content that is used in forming an investment decision.
Added to this complexity is the replication of investment research; many asset managers receive similar reports on companies from multiple providers. To date this has not been an issue, as research has been bundled with the cost of transactions. Under Mifid II, the cost to the portfolio manager must be understood.
There is intense speculation about the impact of Mifid II, including a rationalisation among sell-side providers or a flight to quality. Early moves have included the unbundling of research by some of the larger asset management firms, although funds still need to be ring-fenced for external third-party research. The smaller boutique asset managers could face additional charges, which will drive up costs for their clients.
Options for asset managers
There are three options for asset managers to tackle the research unbundling requirements of Mifid II cost effectively:
- Research aggregation platforms: These either price research insights as a product to buy on a per-report basis, or take the ‘as a service’ model approach, offering a single subscription that enables access to everything on the platform. Research from sell-side and independent providers can sit side-by-side on such platforms. These digital solutions, offered by FinTech companies, create an audit trail for purchased research and compliance monitoring. Some providers can add enhanced analytics capabilities to determine consistency and quality over time.
- Expand internal research: Asset managers could opt to expand internal research capabilities, hiring experts to work inhouse. In practice, however, this is likely to be expensive given the skilled resources, infrastructure and data required to deliver the research.
- Offshoring: Another way to control costs is to opt for an offshore provider, which will keep costs to a minimum compared with inhouse options. As competition throughout the industry increases, providing quality content at a competitive rate will be important.
Taking a pragmatic approach
To comply with the unbundling requirements of Mifid II, the optimal approach for many asset managers will be to combine all three strategies above. This will enable them to create an online portal that fits their investment strategy, enabling third-party providers to deliver, aggregate and summarise required research. This approach will alleviate the challenges associated with information-overload faced by many investors. It will also create an environment in which investors have easy access and built-in search functionality to the appropriate intelligence when they need it.
These platforms will also provide visibility of costs, which can be integrated into a management overview that includes a comprehensive audit trail. Data can be analysed to provider deeper insights and monitor performance.
Given the regulatory focus on transparency, fundamental change in the investment research market is a certainty. With less than a year before Mifid II comes into force, asset managers should be focused on creating a cost-effective, value-added research strategy that delivers the very best experience for their clients and themselves.