Financial Times: Fund managers count cost of Mifid research shake-up

10 March 2018

Asset managers are setting aside tens of millions of dollars after agreeing to swallow the cost of paying for investment research following the introduction of wide-ranging European market rules this year.

The additional costs are hitting fund manager profit margins at the same time that they are coming under intense pressure to reduce fees. The Markets in Financial Instruments Directive, or Mifid II, brought sweeping changes to Europe’s finance sector in January, including requiring fund managers to pay directly for research rather than receiving it for free from brokers and investment banks. Almost all big investment houses decided to shoulder the cost of research rather than pass it on to clients.

The initial figures are significantly below some industry estimates in the run-up to the rules being brought in. A survey of members of the CFA Institute, the investment association, in November showed respondents expected to pay a median of 10 basis points of assets under management for research each year. This equated to $1m costs for every $1bn of assets. But the early estimates from fund companies put the outlay at less than a tenth of those figures. Moody’s said the broader impact of complying with Mifid II would increase fund manager spending by 0.5-5 per cent, including compliance, disclosure, budgeting, audit requirements and research costs.

The additional costs are likely to be much tougher for smaller managers, which are expected to significantly reduce the amount of research they use. Just two big European fund companies, Carmignac and Deka, are passing the costs of unbundling research on to clients after Fidelity International backtracked on its stance last month.

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