FOR RESEARCH

FOR INVESTMENT RESEARCH

How is investment research impacted?

 

In terms of investment research, the MiFID II regulatory changes will alter how asset managers procure, value and use research services.

MiFID II Objectives:

Increase transparency and protection for investors

Shift trading towards structured marketplaces

Lower the cost
of market data

Make costs of trading and investing clear
and explicit

Put simply,  MiFID II for investment research states that brokerages providing both research and execution services will need to supply and price them separately.

This means that under MiFID II:

1. Asset managers must have clear and published research procurement, valuation and tracking processes and policies in place

2. Research providers must unbundle and separately price research services from other broker services (e.g. execution) – not linking research to transaction volume in any way

3. Asset managers must set client agreed budgets up front for specific research services

4. Asset managers must track the usage and value of research and revaluate services periodically

How to Pay For Investment Research

 

MiFID II compliance dictates that there are three ways to pay for research services:

1. The P&L Method - which should reduce onerous admin and provides zero inducement risk.

2. Transaction Method – which is exempt from VAT, provides global consistency and is a similar framework to CSA.

3. Accounting Method – which naturally offers complete transparency to the client.

Any increase in the research budget should happen after clear information is distributed to clients with a straightforward process in place to rebate any surplus budget in the following period. You will need to provide a written policy to clients describing all necessary information, including how the firm intends to allocate costs fairly across various clients’ RPAs.

However if you do use a RPA, it’s important to remember that no directed orders are allowed and you should provide a summary of the providers paid, including: amount, time frame, and any rebate or carry over. Research charges should also be kept within approved budgets with research fees being payed based on budget, not volume or value of transaction. Separately identify the research charge for every client/fund and agree with clients the research charge as budgeted and the frequency of deductions and payments.

What Are The Valuation Requirements?

Each firm must publish its research procurement, valuation and usage policy for clients and log all research usage (analyst calls, presentations, reports read etc). Firms should demonstrate that research that is paid for using commission qualitatively improves the investment process ‘substantively’. Regular revaluation of research services is also needed to ensure they are providing value.

How To Source Research Which Complies?

You should always look for your research requirements to mirror your investment philosophy. To be compliant with MiFID II consider which assets and geographies you typically invest in and whether there are any specialist areas you need specific coverage on. Consider how research integrates with your typical workflow and services. Properly defining requirements and budgets is a good starting point for acquiring research. Document your investment strategy, market cap method and investment style to help pinpoint the most relevant sources. Being involved in dialogue and asking the right questions to prospective providers is also highly recommended.

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