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CFA Institute sheds light on broker research dilemma

broker researchAsset management firms that continue to charge clients for third-party securities research may find themselves in a minority of 15%, a survey indicated.

The CFA Institute obtained survey answers from 705 people at 400 asset managers in Europe about how broker research will be treated once Europe’s newest capital markets rules take effect from January.

Just over half (53%) expected their firm to absorb research costs under the revised Markets in Financial Instruments Directive, known as MiFID II – but the survey also found that, as a result, this majority will probably source less research from brokers.

About 20% of respondents were still unsure about how their firm would treat the costs and 12% expected a mixed approach.

The CFA Institute reveals its findings in the ‘MiFID II: A New Paradigm for Investment Research’ report.

Questions to the survey participants about the expected annual cost of research revealed a wide range of responses:

  • There is uncertainty over pricing and negotiations are ongoing
  • The median value of the annual expected cost of equity research was 10 basis points
  • This equates to €1 million per annum on a notional €1 billion assets under management (AUM)
  • The cost of fixed income, currencies and commodities research is about half as much (€350,000 per annum on a notional €1 billion AUM)

The report found professionals at larger firms were more inclined to expect their firms to absorb costs and it revealed concerns that smaller firms would have with the costs issue.

Problems for smaller firms have been widely aired in the MiFID II debate already, with these asset managers facing high charges for research if they take the research costs onto their own profit and loss, or a PR dilemma if they don’t.

Rhodri Preece, regional head of capital markets policy at the CFA Institute and author of the report, is supportive that the MiFID II changes will make the market in research less conflicted and more efficient, but said that the rules were “not a panacea”.

“Some respondents were concerned about unintended consequences, including a decrease in the availability of research and a reduction in research coverage,” Preece said.

He described the MiFID II broker research requirement – which is for firms to establish a price for investment research and charge for it separately from execution services across all asset classes – as one of the “most significant aspects” for investment managers and brokers.

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