Asset managers in Asia have begun addressing the likely impact of Europe’s Markets in Financial Instruments Directive II (Mifid II), which is set to have a big impact on how research is paid for well beyond the EU’s borders.
On April 1, First State Stewart Asia (FSSA) became the first investment management team to announce it will stop paying for brokers’ research and advisory services out of client dealing commissions.
The team, under Australia’s Colonial First State Global Asset Management, has moved to an execution-only trading charges model ahead of Mifid II, which will come into effect on January 3, 2018.
This wide-ranging piece of legislation is forcing fund houses with Europe-based funds or clients to either pay for brokers’ research themselves or provide clients with an itemised bill breaking down costs for research and execution.
Mifid II puts the onus of compliance firmly on the buy-side, but is also forcing the sell-side to work out how much to charge for research it previously provided for free, often in large quantities.
And while the fast-approaching deadline has been forcing European funds to get their act together, Asia is far from immune, said Justin Ong, PwC’s Asia-Pacific head of asset and wealth management.
“Mifid II’s implications extend far beyond Europe’s borders,” he told AsianInvestor. “The ripple effects are hitting Asia now too, since fund managers transacting through European brokers will have to adhere to Mifid II, and they need to start thinking about what they’ll do.”
This affirms a prediction made by Leonard Ng, a London-based partner at law firm Sidley Austin, that the directive could have a knock-on effect in Asia. He told AsianInvestor in August last year that institutional investors could ultimately demand higher levels of transparency from banks in their own markets.
Those with Luxembourg-domiciled funds will also be affected, although portfolio managers think the Grand Duchy is unlikely to see any drop-off in business given the fund flow benefits it offers are likely to far outweigh the burden of itemising research costs.
FSSA takes it on the P&L
Some European funds have already decided to pay for research themselves after baulking at the work and costs involved in providing clients with itemised bills, known as Research Payment Accounts.
FSSA has now followed suit and will pay for brokers’ research separately. Michael Stapleton, managing partner at the team, told AsianInvestor that each of its global investment teams have been given leeway to decide which approach they want to take for non-EU clients.
“As we manage money for clients right around the world, it’s important that we treat all of them in the same way, so whilst Mifid II is EU legislation, we have applied a single policy and approach across our clients globally,” he commented.
He said the firm expects to take the first financial hit on its profit-and-loss account before the end of the calendar year, once it has wrapped up a new pricing model with its brokers. It has also decided it will not amend client fees.
Stapleton runs the Asia and Greater China equities investment team, which has a 20-strong team overseeing $22 billion. He said most research is already conducted in-house.
Bargaining with brokers
Indeed, many fund managers will be hoping their growing in-house research teams give them a far stronger bargaining hand as brokers assess how much to charge them for research.
Brokers meanwhile are faced with the difficult decision of how to formulate a pricing model, which enables them to maintain adequate research output within funds’ tighter budgetary constraints.
“This problem has been building for over a decade and well before Mifid II,” explained Rupert Mitchell, chief executive of View from the Peak, an independent research provider. “Brokers are well aware their research costs are out of kilter with what funds can likely afford on a stand-alone basis.
“How can a single broker charge a fund let’s say $1 million for all of its research when it knows that same fund is probably only budgeting a couple of million to pay for all the research it currently sources from a 20-strong broker list,” he concluded. “The sums just don’t add up.”
The second of this two-part series will take a look at the potentially damaging effect this trend is likely to have on sell-side research resources.
* This article has been updated to clarify that First State Stewart Asia is a team rather than an independent unit under Colonial First State Global Asset Management.