In our recent survey* of smaller Asset Managers, more than 80% of respondents expected consumption from Independent Research Providers to either remain flat or increase in future. How will MiFiD II impact the industry?
The survey also found that smaller buy-side firms are looking for new sources of research.
MiFID II has far-reaching implications for both buy- and sell-side firms, including how investment research is consumed, paid for and valued.
Find the highlights of what Mahesh had to say:
What are the chief implications of the research unbundling section of MiFID II?
One thing is certain: the implications are profound and far-reaching.
MiFID II will affect both the buy-side which consumes research and the sell-side that produces it. Although some of the regulations are still evolving and could change further, the regulator has been clear about three aspects:
- Research products and Services can no longer be consumed for free.
- It is not just the research itself that is affected by the changes, but rather the whole package, including, for example, investor trips, analyst calls and meetings.
- There is no prescription relating to how firms must pay for research. Rather they are obliged to implement a systematic process relating to their dealings with the sell-side, including which brokers and independent researchers they use, what they consume and how they value it.
How will buy-side firms deal with these implications?
We expect the buy-side to react to the changes in two ways:
- Firstly, buy-side firms are likely to view this as an opportunity to optimize their research spend. They will ask questions about which brokers add the most research-related value, which is likely to lead to the big asset management firms streamlining and reducing the number of brokers they use. For example, a big asset manager currently using 50 brokers or independent researchers could shrink these resources to perhaps 10 in total.
- Secondly, we expect the buy-side to pay increased attention to how they track research consumption. We expect an increase in internal controls to track specific usage – for example, exactly which analysts are consuming which research and from which firms.
What is your advice to those that produce research — both sell-side and independent research firms?
The sell-side must think about their role and the value that they add.
- Big firms should emphasise the total value of what they offer, including analyst meetings and corporate access.
- Mid-sized firms should look for ways to differentiate their offering. For example, there could be a specific region or sector where they are the research leaders.
- Small independent research firms should view these regulatory changes as an opportunity. Whilst these firms don’t cover the entire market, they usually focus on a few sectors or companies very effectively and this provides them with an opportunity to showcase their expertise.
Moreover, the sell-side must not only consider how they produce their research, but also how they distribute it post-MiFID. An evolution in distribution is on the horizon, and we expect to see different distribution avenues emerging – including social media and portals.
Will the impact be global?
Absolutely. The buy-side is striving for global harmonization of procedures. Likewise, the sell-side desires straight, simple policies that apply globally. Therefore, even though the regulations are emerging in Europe, their impact will undoubtedly be felt globally.
Find out more about how we can help buy- and sell-side firms navigate the Research unbundling requirements of MiFID II
*In Q4 2016, we surveyed Asset Management firms globally with Assets Under Management under $25bn. 63 responses were received representing a 0.4% response rate.