The much maligned second Markets in Financial Instruments Directive (Mifid II), which aims to make fund managers pay brokers separately for research and trading services rather than bundling costs together, is set to cause a drastic shift in the industry according to new research.
Most analysts are currently paid for by the commissions generated from equity trades, which are then divided up inside the broker house along with other streams of cash.
But a report, released today by corporate broker Capital Access Group (CAG), has found that the salaries of the current number of analysts are not covered purely by commission. In fact, just 662 of the 1,248 UK analysts would have their salaries covered by the amounts which fund managers are currently paying.
Fund managers surveyed by CAG are also looking to reduce their spending. The firm believes that payments for research could fall to £90m by 2021 – sufficient for just 430 analysts.
“Our work uncovers a market where broker investment research and company meetings with investors appear to be subsidised by a range of income streams, including commission but also corporate broking and deal fees,” said CAG director Scott Fulton.
Unbundling these services could create a situation where just a third of the current analyst community will be paid by investment managers, and meetings with companies are not paid for at all.
Because fund managers will now be paying for research alone, CAG thinks three tiers of analyst will emerge. Big-name firms will charge a premium for a full subscription, second tier will offer research on an “on demand” basis and the third tier will produce Mifid-exempt, non-specific “market commentary” paid for by corporates and given out for free.
Hedge fund manager Crispin Odey, in a letter to investors seen by Bloomberg, said that Mifid II could even cause the cost of capital to rise because fund managers will have access to different levels of analysis. Those with reduced access to analysis would trade less, he theorised.
Further down the line, Mifid II could lead to an even more fundamental shift in analysts' roles, said Fulton. “Star individuals” in the City's top firms may realise that their research is raking in millions for their employers, and decide that they could keep a better cut by operating on their own.
This may become even more obvious as brokers learn how to milk fund managers and branch out from creating subscription-based analyst notes, Fulton explained.
“If you as an analyst are faced with the scenario that you're going to make more money on a call or in a presentation, then why would you put the entire joke into the research note? Notes may become teasers, and the punchline will be on a phonecall or in a meeting where you can make a lot more money,” he said.