Prior to MiFID II, research costs were often bundled into overall transaction fees paid by investors to managers. Since 3 January 2018, asset managers have been required to charge for research separately from execution services. This means that firms have had to decide between paying for the research themselves or recovering the cost from the client through a research payment account meeting specific criteria.
Concerns were raised from the industry that such a move would cut research coverage on smaller companies and make it uneconomical for brokers to focus on anything other than large, listed companies.
Approaching two years into MiFID II, a report released by the Financial Conduct Authority (FCA) earlier this month has found that most asset managers have chosen to pay for research from their own revenues. In a sample of firms, the FCA considers that this has saved investors in UK-managed equity portfolios around £70m in the first six months of 2018.
However, the review also found that research budgets have fallen by 20%–30%. According to the review, most asset managers responded that they are still getting the research they need in spite of this and that research coverage of small and medium enterprises listed in the UK has not seen a material reduction thus far. Nonetheless, it is difficult to see how such a large budget cut could fail to impact on the coverage and quality of research.
It remains to be seen what continued impact the changes will have in the asset management industry.
Since the introduction of the reforms, budgets set by firms to spend on research have fallen on average by 20%-30%.