New MiFID II rules on payments for investment research that went into effect January 3 have already shrunk the market for European equity research by an annual $300 million, and the ultimate impact of the regulations likely won’t be evident before the end 2018, according to a new study from Greenwich Associates.
With a growing number of institutional investors announcing that they would cease charging clients for research and instead absorb research costs into their own P&Ls under the new rules, Greenwich Associates in 2017 conducted a special study of 88 institutional equity investors in Europe and the United States to determine how these changes have affected the industry and what the market can expect now that MiFID II has taken effect.
The study results show that, in the run-up to MiFID II implementation, the 39 Europe-based study participants reduced their 2018 research/advisory budgets by 20% year-over-year. Greenwich Associates estimated the 2017 European research/advisory pool at $1.35 billion, meaning the 2018 market has shrunk by nearly $300 million.
Despite these industry-wide reductions, a third of study respondents will pay research providers the same amount as last year. “Managers express concern about the message it would send to their investors if they made sudden and substantial cuts,” says William Llamas, Associate Director of Relationship Management at Greenwich Associates, and author of a new report, MiFID II is Here: How Investment Managers Have Prepared. “Any sign that managers have been wasteful in their spending in the past would resonate poorly.”
MiFID II has also prompted investors to cut ties with some research providers. European respondents have reported more than a 20% decrease in research counterparties. Despite these cuts, there is good news for research providers. Since both budgets and provider lists have been reduced to a similar degree, the amount budgeted for each provider/broker will remain relatively flat year-over-year. “In other words, if you make the cut, you won’t get axed,” says William Llamas.
The report also examines the behavior of U.S. institutional investors, many of which must comply with MiFID II rules in order to continue managing their European clients’ money. A growing number of U.S. asset managers are following the example of their European peers by opting to pay for research themselves under MiFID II.
The Problem of Pricing Research
With MiFID II now in effect, investors and providers are engaged in tough negotiations about how to price research. About half of institutional investor relationships with bulge-bracket research providers are “full service,” meaning that the investor receives all written and electronic content, access to analysts, corporate access, and other products and services for one set price. The new Greenwich Report provides typical pricing levels for these relationships, as well as for “mid-level” access and “written only” research relationships—some of which have been priced as low as $15,000 per year. “Pricing research at such a low level puts enormous pressure on small providers whose core business is producing equity research,” says William Llamas.