MiFID II: Clients' research charges seven times higher than costs borne by asset managers
Does it equate to superior performance?
MiFID II rules regarding research costs - which force asset managers to choose whether to 'unbundle' research costs charged to clients or take the hit themselves - have seen fund charges for clients of asset managers in the former group reach up to 7.5 times that of those not charged for research.
Under MiFID II, which came into force in January, asset managers must set budgets for investment research, leading most UK firms to take the cost on themselves, via their own profit-loss account.
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According to research by Frost Consulting, seen by the FT, emerging market equity funds charging clients for research are spending 7.5 times more on average compared to those that absorb the cost.
For European equity and North American equity funds, the cost is 3.8 times and 2.7 times respectively.
Chief executive of consultancy Quinlan & Associates Benjamin Quinlan said that if an asset manager was paying a "fraction of what peers are spending when using [their] own P&L, it's a tacit indication that [they] actually don't need more research".
Few of the largest asset managers in Europe, barring Carmignac and Deka, opted to pass the cost of research on to clients, but smaller firms are more likely to have chosen this mode.
Neil Scarth, principal at Frost Consulting, explained that research is now asset managers' second-biggest cost after salaries, with "the P&L decision [creating] potential profitability issues for managers".
He warned a decline in research spend by asset managers opting to absorb the cost could affect returns.
"A decrease in performance would be far more significant than the overspend on research," he said.
MiFID II research changes have led to a price war between sell-side firms, while many buy-side firms have reduced the number of investment banks and brokerages they use.
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Quinlan & Associates figures suggest that firms paying for research themselves are spending up to two basis points of their total AUM on research, while those using client funds are paying between seven and 12 basis points.
Quinlan said: "[The] initial feeling is that funds passing on costs to clients are not being selective or disciplined enough with their research spend.
"Unless funds passing research costs on to end-clients are offering truly superior investment performance with much lower fund management fees, I see this as a dying model and the move to P&L being the industry norm."
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