Research and Mifid II: Better quality, lower cost

The European legislation requires the separation of execution services and research costs. Last week, T Rowe Price became the latest in a growing line of investment groups to declare an intention to shield clients from its research costs.

Execution costs should fall. Research costs should fall. All of the other costs should fall as well

Michael Hufton, ingage IR

With its proposal, the group joins Vanguard, Aberdeen Asset Management and Baillie Gifford. A minority of groups, including Amundi and Invesco, will pass their research costs on to clients

Costs to fall

Regulators hope that Mifid II’s introduction in January will enhance investor protection through the unbundling of the costs associated with fund management.

Michael Hufton, managing director at consultancy ingage IR, said that once schemes have full transparency of these costs then they should reduce.

“Execution costs should fall. Research costs should fall. All of the other costs should fall as well, because people should be able to see what part of the bundle they should be,” he said.

“Specifically for the end investor… we will see some real evidence that a lot of the parts of that bundle are likely to be taken directly onto the [profit and loss statement] of the fund manager.”

Hufton said that ‘corporate access costs’, which are incurred through the interaction of fund managers and companies on the receiving end of investment, will have to be assumed by the fund manager. These fees have generated longstanding criticism from investors and regulators.

All things being equal, a fall in the financial burden of fund management would result in higher returns for schemes and their members.

Time to standardise

The fund management industry’s failure to segregate execution and research costs in the past has posed a challenge to trustees.

Caroline Escott, investment and defined benefit policy lead at the Pensions and Lifetime Savings Association, said this forms part of a wider problem in the way that “general performance and costs are presented to trustees”.

Improvements in transparency brought about by Mifid II should help trustees through “information presented in a decent, consistent and standardised format… to scrutinise the value they’re getting from their asset managers”.

Schemes will have to consider the stances adopted by their respective managers in response to Mifid II. However, according to Escott, this is unlikely to be a red line during a scheme’s assessment of an asset manager.

“I think it would have to be taken as a separate piece to the whole in terms of the range of services and quality of service that this asset manager is providing,” she said.

“Cost is definitely part of what you want to assess when you think of the kind of service that you’re being provided with on investment matters.”

However, policy, competitor performance, responsiveness and the manager’s understanding of the scheme’s investment objectives principles are also fundamental to the manager selection process, she said.

Mifid II “would be an additional factor to consider, but I think most schemes would take it as part of the whole” when reviewing a manager, Escott added.

A rise in research quality?

Experts agree that the cost of research will be affected by the introduction of Mifid II. Research quality is also likely to come under scrutiny.

Greater clarity over the nature and costs of research is likely to improve competition and thus research quality, according to Hufton.

James Alexander, associate director at consultancy KPMG, said prices will diverge in relation to the value offered by providers.

He said: “The really top analysts… and all the people who have a real point of differentiation in the research they’re offering, are those who are going to be in high demand and are going to be able to charge for that accordingly.”