Unprepared asset managers could be facing a hefty unexpected research bill

Asset managers who have not fully thought through the process of paying for investment research could be presented with an unexpected bill stretching into the "tens of thousands" of pounds, according to new research.

The end of March marked the close of the first quarter since the implementation of sweeping new regulation, the second Markets in Financial Instruments Directive (Mifid II), which forces asset managers to pay brokers for research rather than receive it in return for a commission.

Though many asset managers may have agreed a basic fee for research from their brokers, according to research marketplace the Electronic Research Interchange (Eric), they may not be ready for the cost of extra interactions with the broker which they previously took for granted.

"The heavily discounted prices of basic access that some negotiated will unlikely include conversations had with banks’ analysts in Q1 2018," said Chris Turnbull, co-founder of Eric.

"Premium research takes many forms, of which time with top analysts is just one. Invoice shock may catch managers unaware as they slowly wake up to the true price of broker insight."

Two sources in the industry told City A.M. that any far-reaching shock was unlikely, since most managers are aware of what they are being charged for research and what is included in those sums.

City A.M. also understands that some brokers and fund managers are employing weekly "time sheets" to analyse and add up the weekly interactions between them.

Scott Fulton, from Capital Access Group, even went so far as to say that the real shock would be brokers being willing to set aside such relatively small sums for meetings and not insist on payment.

"I cannot see too many brokers insisting on a small research payment which would adversely affect their relationship with the fund managers," he said.

"The apparent cost of research under Mifid II pales into insignificance when compared to the fees charged by brokers to corporates for new issuance, secondary raisings and mergers and acquisitions. Brokers will not want to put this income stream at risk by insisting on payments for analyst calls and meetings which the fund manager did not expect."

Though both Turnbull and Fulton believe brokers and asset managers will have to re-evaluate research fees as costs become more clear, they differ on which way the revision will go.

While Turnbull has said research costs will rise to include elements such as face-to-face meetings with analysts, Fulton thinks they could be pushed down which would "accelerate the migration of analysts to corporate finance and, possibly, out of the industry all together".

Let's block ads! (Why?)