Investment managers are expected to cut their spending on broker research and execution by $1.5bn (£1.13bn) following the implementation of the second Markets in Financial Instruments Directive (Mifid II) in January, according to a new study.
The report, from management consultancy Oliver Wyman, has predicted this could rise to $3bn “if a full-blown price war emerges” between research providers, such as brokers and banks.
Oliver Wyman puts current investment research spend at $5bn.
This comes as two more investment managers – Deutsche Asset Management and Franklin Templeton – announced today that they will absorb research costs, rather than pass the “burden” on to clients.
“As we strive to deliver both certainty and transparency to our clients, I am pleased to announce that Deutsche Asset Management will absorb the cost of external research for funds under the new Mifid II directive. We strongly believe that our approach is the best possible solution to the requirements of the new directive,” said the firm's head Nicolas Moreau.
Mifid II forces banks, brokers and trading firms to invoice buy-side investors for the research they provide, rather than bundling the costs in with other services such as broker execution.
This is designed to increase transparency in the fund management industry, and allow end-user clients to see how the money they are paying the fund manager is being used.
But the regulation has left buy-side investors scratching their heads over where the money should come from to pay for this research.
They can either allocate the costs to their funds and mandates – effectively the clients – or do as Deutsche and Franklin have and absorb the costs from their own balance sheets.
“After months of deliberation over whether or not investment managers should get out their wallets to absorb research costs, it appears the majority have finally decided to dust off the cobwebs and pay from their own profit and loss [account],” said Daniel Carpenter, director at technology firm Meritsoft which helps brokers track trade executions and research commissions.
But the picture could get more confusing for the research providers, some of whom will never have directly had to charge for their services.
“The problem starts to get really thorny when you tie it to regional or global commission-sharing agreements,” said Carpenter.
“Under Mifid II banks are anticipating the number of rate cards, which outline commission rates on each transaction, shooting up from the hundreds to the thousands over the next six months.
“All of this means that brokers need to find a way to manage multiple rate cards across the globe across different markets and numerous instrument types.”