Upcoming rules under EU’s MiFID II regime to bring about level playing field for asset managers

Paying 3000 pounds for an hour’s chat with a “rock star” analyst to be a thing of the past.

On Monday, as per a thinktank’s findings, banks which charge thousands of pounds for briefings from top analysts typically exemplify an opaque and expensive model for paying for stock tips – a move that will be challenged by upcoming European Union rules.

Under new forthcoming EU rules, slated to come in force from January 2018, banks will have to itemize trading and research fees so as to bring about more clarity to asset managers so that they know exactly what they are paying for.

The move is likely to make asset managers more mindful about the quality of stock analysis and is likely to trigger a price war, states a report from the Centre for the Study of Financial Innovation (CSFI).

However, it is, as yet, unclear how research is to be priced under the EU’s MiFID II regime. While for some going behind a “paywall” could work so that the information is not freely distributed to the media, for others, the stratospherically high fees charged by “rock star” analysts at banks for chats about their opinions may now be harder to justify.

“Some are asking 4,000 to 5,000 an hour in pounds, dollars or euros for an analyst’s time. What are they smoking?” CSFI quoted one asset manager as saying. Another asset manager said, an hour’s chat with top law firm Freshfields was better value at 1,500 pounds.

As per the CSFI report, an over-supply of research along with asset managers’ desire to cut costs, is likely to spark a price war in the short term.

“Incomplete pricing information and imperfect ways to assess value are causing anxiety about predatory pricing and unfair competition,” reads the CSFI report which was authored by CSFI co-director Jane Fuller.

Once the EU’s rules kick in, it is expected to normalize the market for research and allow asset managers to weigh price versus quality. However before that emerges, the environment is likely to be harsh.

As a result, banks have started shredding analysts to restore profitability, asset managers are facing strong criticism from the high fees they charge investors, with many of them increasingly leaning towards “passive” investments rather than taking active bets on selected stocks.

According to the bulk of participants interviewed by CSFI, they expect asset managers to spend less on research in the next year or two because they are under pressure to absorb the cost.

An estimate sees the number of analysts at banks dropping by 25% to 30%.

While there is a general disagreement over how chaotic the market is likely to be in the next year or two, market participants generally feel that capacity needs to be trimmed before the market can stabilize and grow again, states the report.

The ones who are likely to lose out could be “closet tracker” funds that mimic benchmarks but charge higher fees than passive funds.

In contrast, independent research firms could emerge as winners if they can demonstrate the worth of their asset managers, reads the report, although The European Association of Independent Research Providers (Euro IRP), which helped fund the CSFI report, said the playing field in research may not be level for some time.


Categories: Creativity, Economy & Finance, Entrepreneurship, HR & Organization, Regulations & Legal, Strategy

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