Over three months on from the implementation of Mifid II, the market continues to grapple with what constitutes a fair price for research.
The cost of written research fell to surely unsustainable levels in the lead up to Mifid II implementation. Now is the time for asset managers and brokers to find common ground over pricing, helping to ensure valuable research services remain in place.
We are starting to see a number of pricing issues arise. Crucially, asset managers may be finding that bills for research services are significantly higher than they first imagined.
The heavily discounted prices for basic research access that some negotiated will unlikely include conversations had with banks’ analysts in the first quarter of 2018.
Conversations that were previously considered informal and just one part of a broader relationship with a broker must now be itemised - and are fully chargeable.
On the other side of the coin, brokers may be discovering that the discretionary payments they hoped to receive are not materialising.
Three-month trials for broker research content will have now come to an end and such research that may have been received for free will now have to be paid for or dispensed with.
The shock of these bills will force managers to wake up to the true price of broker insight
But who will blink first in terms of a compromise?
There is a sense that the sell side is very keen to see agreements reached so they can receive payment; however, we could see brokers starting to drag their heels if they aren’t being paid enough by asset managers.
The sell side will need to hold its nerve without dropping prices, allowing the best value providers to rise to the top.
This will be difficult for tier two and three banks and brokers who lack the reach and distribution channels of bigger banks and the differentiation of specialist providers.
Independent research houses that have used the 'if you don’t pay, you don’t get' model for a number of years and have learnt how to adapt may be well placed.
Brokers of all sizes have the ability to make their research offerings profitable; however, they will need to deliver a range of services through a clearly differentiated pricing structure, with bespoke studies and unparalleled analyst access, benchmarking the top-end of the value they create.
Over the next quarter, asset managers will have the opportunity to meet with their research providers, establishing a better understanding of what the gap is and how they intend to fill it.
As a result, we should start to see a gradual improvement in price transparency, which will allow asset managers to form more effective relationships with their key research providers.
If overall transparent costs can be agreed it mitigates the need for fund managers and brokers to record every interaction, saving time and energy for both the buy and sell side.
There has been pushback from some fund managers on how long the recording process is now taking which is, in effect, changing the nature of their role.
Going forwards, we are also likely to see an increase in demand for ad hoc research as fund managers decide what they want and how to navigate the rules. Fund managers will still need to keep an eye on the continuously evolving research market to ensure they have access to new products and providers.
Nevertheless, we do not foresee that asset managers will employ individuals in-house to monitor external research content as each individual manager will have a better idea of what they need.
For those fund managers who are managing their research consumption closely, meeting company management will become an ever more important element and the costs associated with this will need to be considered.
As the industry continues to adapt to Mifid II, it remains to be seen whether intervention from the regulator will be required, perhaps to look at the continued use of the ‘broker vote’, having research services valued ex post.
The unbundling rules appear to have achieved the main aim of securing a better and more transparent outcome for end investors. But further action could be necessary to prevent value destruction in the research industry, which would be detrimental to investors and counter to the Mifid II ethos.
Chris Turnbull (pictured) co-founded ERIC (Electronic Research Interchange)