MiFID seen driving 20% cut in funds’ outside research budget

A $300 million reduction to external research budgets expected

10:51 January 13, 2018


European fund managers have cut their 2018 investment research budgets by 20 per cent as they scale back the number of providers they use in response to MiFID II.

That’s according to a survey of fund managers conducted by US consulting firm Greenwich Associates, which assessed the shake-up to the multi billion-dollar market for research under the European Union law that started Jan. 3. The law requires asset managers to separate payments for investment research from those for brokerage services to execute trades.

The decline in spending from last year prompted by the revised Markets in Financial Instruments Directive, or MiFID II, is largely driven by more selective fund managers buying research from a smaller number of banks, according to the survey. For those who “make the cut,” there’s encouraging news: the amount budgeted for each provider will remain relatively flat.

“Over the last two years, European investment managers have clearly expressed their intention to reduce equity research spend,” Greenwich Associate Director William Llamas said in a report set for release on Tuesday and based on data gathered late last year. “The official data is telling a more aggressive budget-cutting story.”

Greenwich, which last year predicted a $300 million reduction to external research budgets, found the biggest budget changes at fund managers based in continental Europe — a 32 per cent decline — compared with a 17 per cent drop in the UK. The finding was based on responses from 29 firms.

“Throughout the MiFID II build-up, U.K investors have been ahead of the continent in terms of preparedness,” Llamas wrote.

The study found that the median annual budget for “full-service” research from each big brokerage is a little more than $200,000. That is three to six times bigger than the budget for the same type of service from smaller brokerages and independent providers.

While MiFID applies to the 28-nation bloc, US asset managers are increasingly preparing to adopt the standards to their business, the study found. That sentiment echoes findings in a CFA Institute study last year that showed 54 per cent of respondents think it is very likely or likely that MiFID-style unbundling practices will be adopted outside of Europe in the next five years.

“I think there is a chance that in the next two years, the MiFID approach to paying for research and avoiding superfluous research that doesn’t really help investment processes will become quite normal around the world,” Jim McCaughan, chief executive officer at Principal Global Investors, said in a Bloomberg TV interview. “I think MiFID will turn out, if the research regulation continues the way it is at the moment, to be quite a benign sort of regulation that will change capital markets around the world.”