The future of research
The advent of MIFID2 in January has led to some significant changes in how asset managers obtain their research. I attended the 4th Global Independent Research Conference yesterday and it is clear that there is still a lot more to come. Two months after MIFID2 kicked in, many large buyers of research have either cut their research budgets, or simply issued ‘cease and desist’ notices on their research providers at the behest of their compliance departments while they make sure their houses are in order. Large investment banks’ research departments have slashed their proposed fees, perhaps going for volume, while smaller independent firms seem to have borne the brunt of the cuts.
The conference keynote speaker from the FCA made it quite clear that the new rules do not in any way force buyers to act as they have. There is an onus on them to demonstrate value obtained for the end-client, always a difficult subject with research, but the FCA speaker was explicit that did not mean that research could not be received while they sort out internal processes. Nor do the rules preclude offering trial periods at nil or reduced cost, or providing sample research while looking to clinch a sale.
What happens next? The FCA painted a picture of sunny uplands where independent research can compete on a level playing field with the large banks. In contrast the general consensus among most providers was one of, in the Duke of Wellington’s words, hard pounding. The optimists remained hopeful that pricing would rise and that firms who chose to research internally would actually end up with larger research budgets. The pessimists focused on the availability of free research, and the passing of control among the buy side to the Finance Director and compliance departments.
In the longer term, the availability of good quality research is important. Without it, markets become less efficient and companies may choose to turn to other sources to find finance. In the short term, perhaps the best thing the FCA could do is to send a message to buy-side firms to make it clearer what is and what is not permitted. And portfolio managers represent to their compliance teams the need not to be more draconian than necessary.