BCA Insights

News and articles from around the globe surrounding MiFID II highlight BCA Research's unparalleled expertise.

How should you pay for investment research under MiFID II?

Brijesh Malkan

In the mainstream press, many high-profile investment managers have recently declared they will absorb the cost of investment research by paying for it through their own internal resources (P&L method). This brings an important question about the implications of MiFID II to the surface: How should you pay for your investment research services?


Ask the right questions about implementing MiFID II 


In our view, you should consider your situation carefully, taking into account the current structure and processes of your firm. The criteria that should inform your decision making are:

  • Cross-subsidisation risks: How easily can you attribute the value of research to specific client mandates and funds (e.g. address the cross-subsidisation issue)? The difficulty of untangling research costs has been a key driver behind many managers’ decision to go with P&L.
  • Asset owner expectation: Have you had any dialogue with your end clients around their expectations? How do they view research costs in the context of the potential moral hazard risks of paying for research through P&L? What about performance objectives?
  • Cost: Have you clearly identified the cost to cover your third-party research requirements? Do you have clear pricing at report-level and for additional servicing? How will taking the cost of research away from execution affect your firm?
  • Regulatory requirements: Have you clearly understood the regulatory requirements and the importance of demonstrating the value of research? Do you plan to maintain a written research procurement policy? Have you implemented inducement protections, irrespective of payment methodology?
  • Investment Strategies: How do your investment strategies impact your capacity and influence your decision on how to pay for research through commissions (e.g. FICC) or P&L?

Our research indicates a P&L Funding may be a cause for concern. 

  • There are over 4,000 managers in Europe that fall in scope for research unbundling
  • Larger managers are now under pressure to move to P&L. Their thinking is driven by key concerns:
    • Siting in regulatory cross-hairs
    • Margin capacity
    • Cross-subsidisation complexity.
  • However, the majority of managers will struggle to get access to the services they need through P&L alone (the impact on margins is anywhere between 7% and 20%).
  • Complexity is increased for managers with US offices, where the regulatory framework prohibits paying for research through P&L.
  • Our research shows:
    • Between 50%-65% will pay through transaction method (commission).
    • Between 30%-45% will pay through P&L method (primarily larger managers and those with significant FICC strategies).
    • Remainder will use a direct charge back (primarily Scandinavian managers who are accustomed this approach).

For many fund managers, the challenge of determining a MiFID II payment strategy isn’t easily solved by looking at what others are doing. Instead, look carefully at your firm to understand and asses its risks and opportunities.


Solving the last mile problem in Investment Research

In recent weeks, we have discussed research’s past, contextualising the challenges of unbundling through the lens of the industry’s idiosyncratic evolution. It’s present, as market participants attempt to value services and implement market structures.

And in this piece, in what has (unintentionally) become a trilogy of Dickensian articles, we discuss the ghost of research’ future – looking ahead to how the value proposition may change over the short to medium term.

Original source: Brijesh Malkan

Read the full article here...

The (behavioural) economics of research unbundling

At a recent event, I listened intently as a portfolio manager explained how he was employing game theory to prepare for upcoming regulatory changes that will unbundle payment for investment research from execution services. He explained brokers that had begun to lower prices were being penalised on the premise that if they have dropped price once already, they will do so again before the year is out.

And the comment resonated. Observing the industry as the shadow of unbundling looms – game theory explains many of the actions. Prisoner’s dilemma, information asymmetry and first mover (dis)advantages all speak to some element of the market dynamics playing out.

Original source: Brijesh Malkan

Read the full article here...

The in(side)s and outs of pricing and valuing research

The Sage of Omaha once quipped “Price is what you pay and value is what you get”. And this neatly summarises how asset managers and research providers should unbundle research from execution and move in an orderly fashion to a priced market.

However, we recently discussed how confusion around the regulatory requirements, behavioural biases and market infancy are all contributing to a painful separation. In my discussions with market participants, pricing and valuing research are cited as the main antagonists in the unfolding drama. And when I seek to understand why – I am often confronted with an inside out process, with asset managers and brokers both attempting to lay the responsibility for pricing and valuing research at the other party’s door.

Original source: Brijesh Malkan

Read the full article here...

Fund Managers Setting Research Budgets

Two thirds of asset managers have set a research budget as required by new regulations in Europe, which consultancy McKinsey said will bring about “an end to equity research as we know it.’

MiFID II regulations coming into force in the European Union in January 2018 require the unbundling of payments for research from trading commissions. Fund managers can either pay for research themselves or from a research payment account, where the budget has been agreed with the client.

Original source: Markets Media

Read the full article here...

Five Years of Work to Do in 200 Days

Asked by a financial regulatory consultancy about their plans for MiFID II, wealth managers recently said they would need an eye-watering 1,363 working days on average to meet the new requirements – and that’s excluding the necessary IT development. This more or less means that any firms who haven’t yet started preparing face a mountain ahead of them: no less than five years’ worth of work to be done in less than a year.

It’s no secret that even the savviest of wealth managers are losing their hair over the gathering tsunami of regulatory burdens, but many don’t appreciate just how unprepared they are for the new rules. What exactly is it, though, that has them quaking in their boots, and just how extensive is the problem?

Original source: Market Mogul

Read the full article here...

Research crackdown to shrink commodity analyst pool, boost select few

LONDON, March 30 (Reuters) - Only the strongest commodity analysts will survive new European rules that require funds to pay separately for bank research from January, with independent firms seen as big winners in the new regime.

The regulation comes under the umbrella of a sweeping new EU law called Markets in Financial Instruments Directive (MiFID II), the biggest overhaul of securities rules in a decade, designed to apply lessons from the 2008 financial crisis

Original source: Reuters

Read the full article here...

How should research be priced in a post-Mifid II world

With MiFID II coming into effect, independent research brokers are seizing the opportunity to provide asset managers with research at better prices. Asset managers are being forced to decide what constitutes as research, but these brokers are walking them through this stage of pricing.

Brijesh Malkan from BCA Research spoke to how this stage of “price recovery and product discovery” is both a blessing and a curse. With the pricing of research sky-rocketing as demand increases, independent research brokers may have the upper hand compared to the larger banks.

Original source: City Wire

Read the full article here...


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