MIFID II will be under every Christmas tree in Europe this holiday season, with a “Switch On” button that will autoboot on Jan 3, 2018! But the minute all the European MIFID II boxes are unpacked, the unbundling of research costs will affect all global asset management and research businesses. And as regulations continue to be regional, the European Fairness based ruling around how research costs are allocated, absorbed and reports; is a huge headache. As always, the intention is ethical and noble (fairness, reduce conflicts of interest, protect consumers etc) but the solution may create unintended consequences.
September started and in the Labor day edition of FT, I was reading about the latest sentiment around how to conduct business after Jan 2018 with brokers, research providers, and institutional clients. Reducing the number of brokers can be part of the solution, reducing external research providers, paying closer attention to the quality of research. This could account for a rough average reduction of 30% of the costs but at the end of the day, asset managers have to decide whether they bill clients or absorb these costs internally (i.e. from their own P&L).
FT was reporting that JP Morgan Asset mgt. (ranked in the top ten asset managers by AUM) had just joined the middle list “Absorb cost = Reduce margins”. Undecided and declining to comment, was still a very long list. Those having decided to “Pass costs onto the client” were 8 large players.
* Previously said it will charge clients, but now says it is still deciding
** Preferred approach, but says final decision has yet to be made
Source: FT research
Just two weeks later and the market tipped after four major European institutional managers changed their position. They switched over to join the heavyweight list with JP Morgan Asset Mgt and Vanguard that took a position from the start in “Absorb cost = Reduce margins”.
“Schroders, Invesco, Union Investment and Janus Henderson have all today announced they will absorb costs onto their balance sheets. All four previously indicated they would pass this cost on to clients as part of fund management charges.” Four managers U-turn on MiFID II research costs
At the same time, the undecided Blackrock also switched to “Absorb cost = Reduce margins” along with Newton Investment Management, Aberdeen Standard Investments, Aviva Investors, AXA Investment Managers, Insight Investment, Deutsche Asset Management and Franklin Templeton. What a rush to make sure that market share is not lost due to price competition. Only Amundi from the first list, the subsidiary jointly created by Crédit Agricole and Société Générale to regroup their asset management operations, hasn’t announced a switch; and the remaining undecided. We still haven’t heard the final decisions from Credit Suisse, Goldman Sachs Asset mgt, Morgan Stanley, and State Street. According to IPE research, only one quarter of the 120 European institutional asset managers have made their decisions.
The devil remains in the details, as always. Many of the large institutional asset managers have both clients in MIFID II jurisdictions but also outside. JP Morgan Asset management is one of those that has publicly announced a very clear position: a) Absorb costs for Non-US clients; b) Fund research alongside commissions for US clients. According to Integrity-Research, there are currently 11 global asset managers that have announced “Ring-fencing” MIFID II accounts: Invesco, BlackRock, Templeton, Janus Henderson, Invesco, Deutsche, Schroders, Vanguard, Northern Trust, T.R Price,..
At the end of a day, what will determine the impact of the research unbundling via MIFID II each business, is the AUM of MIFID II actively managed assets. This varies a lot depending not only by jurisdiction but also by asset class. Traditionally, quant and fixed income research costs were already absorbed by the asset managers. Company and sector analysts were the main areas where regulators saw conflicts.
- Will this be another marginal tilt towards the growth of ETF?
- Will this be another stab to small-cap research?
- Will European budgets for data science, AI, ML, sentiment, NLP etc. increase and traditional equity analysis be reduced before even getting more automated?
- Will European asset managers feel even more pressure to increase AUM in order to mitigate the reduction in their profit margin from absorbing these costs?
Efi Pylarinou is a Fintech thought-leader, consultant and investor.
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