Hermes Investment Management has become the latest provider to decide to absorb external research costs rather them pass them onto clients, ahead of huge changes in this area when MiFID II is implemented at the start of 2018.
According to a report in The Financial Times, Eoin Murray, head of investment at Hermes, described the move as "the right thing to do in terms of the end beneficiary".
"When we looked at the cost of [alternative] arrangements [whereby research costs are passed on to clients] and the amount of compliance you have to put in around those, the difference in budget was not huge," he told the paper.
Murray also told the FT that Hermes has already held meetings with three quarters of the 60 research providers it uses to discuss pricing, adding "some figures are eye-raisingly high, while others are more realistic".
Hermes Investment Management also recently appointed Orla Murphy for the newly-created role of research director ahead of the looming MiFID II deadline.
The implementation of Europe-wide regulations under MiFID II is set to transform the way asset managers pay for external research.
Currently, investment research is mostly charged to investors through a commission-sharing agreement, whereby fund fees are used to pay a broker on the understanding that a portion of this charge will be passed onto an independent research provider, at a variable rate correlated to trading volumes.
However, under MiFID II which comes into force on 3 January 2018, rather than charging a variable rate for each payment, asset managers will be forced to allocate a research budget, which is then charged to their own account.
This fee can then either be paid entirely from a firm's own P&L, or recovered by raising management fees or charging investors from a separate client research payment account (RPA), entailing additional disclosure, budgeting, reporting, and audit requirements.
In a move welcomed by wealth managers, a growing number of fund groups including Baillie Gifford, Woodford Investment Management, M&G Investments, Jupiter Asset Management and L&G Investment Management have already announced they will no longer charge clients for research.
To follow all the latest developments on MiFID II, visit our live blog.
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