Just over two months ago we entered a new era of financial reporting under MiFID II. The new legislation, which came into force on 3 January, was designed to make financial markets more efficient, resilient and transparent. It included the requirement to unbundle investment research from execution, a fundamental change to how the research market operates. Under the new regime, research must now be paid for separately by asset managers breaking from the traditional model whereby much of it has appeared to be provided free of charge, or at least bundled in with other costs such as trading commissions.
“Sell by” and “use by” dates, found on all food items in our supermarkets, have made the headlines recently as many believe that the dates are overly cautious, and as a result too much food is being thrown away. In a similar way, investment research deemed no longer current is consigned to the virtual wastepaper bin, but does it too still have a useful shelf-life?
The advent of MIFID II, with research unbundling and regulated trial periods, means that if handled correctly, recently out-of-date research can be used as first, easy step to making intelligent purchasing decisions.
Since BlackRock announced in September that it would pay for research from its own resources, an avalanche of big names has followed suit, catching smaller asset managers between a rock and a hard place.
Paying via P&L will hit the bottom line of smaller fund managers the hardest, and maybe put them at a competitive disadvantage. Financing research through an RPA misses out on PR kudos at best and could cause real damage at worst. RPAs require intensive administration and are a potential drain on time and money.
With less than 30 working days to when MiFID II goes live, a new study has put this payment dilemma into perspective.
Research unbundling is nearly upon us. Over the past few months, all kinds of hopes and fears have crystallized, whilst new and unforeseen issues have been uncovered on an all-too-regular basis. There have been countless discussions around the “real” value of research, whatever that may be, and the inherent conflicts of interest in the old order. Other themes, such as price discovery and the impact of digital innovation, have also been highlighted.
The MiFID II regulations that come into force at the beginning of 2018 give investment research consumers a stark choice: Determine whether the research that they purchase is substantive, or risk breaching the rules.
Perhaps this requirement for robust evaluation is a good thing. Research will become a commodity in its own right, to be bought and sold just like any other commercial product. It should therefore be subject to rigorous assessment.
The problem is not just how to evaluate, but what to evaluate and how to use the resulting data. This article looks at what form a new evaluation methodology should take, and how best use the resulting data. A more in-depth look at evaluation is available here.