With Europe’s Markets in Financial Directives (MiFID II) approaching its one year anniversary this January 3, the concerns that the sweeping regulations designed to increase transparency and diversity are, paradoxically, going to disrupt markets has thus far been proven unfounded. It has added complexity in some regards and attempted to detach investment research cost from investor gains, among other goals. What also has happened, however, is not quite what regulators had anticipated. A new report from Greenwich Associates speaks to a bifurcated market in investment research, with the fates of independent research providers and big banks moving in different directions.
Source: Eurekahedge
A key MiFID II objective was to unbundle research costs from the brokerage commissions charged to fund managers. When research was paid through commissions, essentially the cost came out of investor profits.
While it remains unclear exactly how much of today’s bank research is paid for at a rate that recoups the full cost of this endeavor, the impact of engaging in the unbundling of research costs, measured in a new report from Greenwich Associates titled “MiFID II at the Midpoint,” reads like a tale of two cities.
The MiFID II expectation was that the buy side would reduce spending with the largest investment banks. With European research budgets being cut by 19% on a year over year basis, representing a $300 million hit, large sell-side institutions have not felt the cuts to the same extent as smaller brokerage or otherwise independent research providers. In response to budget cuts, institutional fund managers increased their allocation percentages to the largest global banks, the report found.
The average number of research providers to large European institutions has dropped from 20 in the second quarter of 2015 to 15.7 two years later. Nine of the largest global banks currently lay claim to 54% of research spending, while 69 of the midsized banks and regional brokerages are allocated 45%. Independent research providers are allocated 1% of the research budget.
