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How should research be priced in a post-Mifid II world?

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How should research be priced in a post-Mifid II world?

Being Mifid II-ready has become a competitive advantage which will set firms apart, according to Brij Malkan from BCA research.

Malkan said his firm is having conversations with asset managers across the world, including in the US, which are either directly under the scope of the regulation because they have end clients in Europe, or because they see it as a competitive consideration. Investors are becoming savvier he says, and will demand their asset manager obtain quality research for less money once they see the cost.

‘We have now gone from being in denial to very much in the process of market formation,’ he said. ‘What’s interesting about that market formation process is it’s incredibly hard for a few reasons. We are going through price discovery and product discovery at the same time, which is almost impossible.’

This means that brokers and research providers are defining what constitutes research from analyst calls, PDF reports to more innovative products, at the same time as trying to devise a fair and accurate pricing model. However, banks are not willing to think about their research on an item by item basis, Malkan argues.

And because the economics of producing research are ‘astronomical’, the solution many are coming up with is a paring back of output.

The prices charged by some banks are still as high as £5 million for a comprehensive research package, but as they are faced with more scrutiny over providing value for money, prices may start shifting down. 

This gives asset managers an opportunity to obtain better research at better prices and ‘broaden who they receive the research from’, Malkan said. But asset managers need to focus on how much value a particular piece of research actually adds to their investment decisions and move the conversation from quantity to quality, he advises.

‘There is a broader environment of research products out there. They need to look for independent, conflict-free research and will find prices are actually reasonable.’

Fund houses including Jupiter, M&G Investments and Woodford Investment Management have already announced that they will pay for research themselves. Meanwhile, French investment manager Amundi will pay through a commission sharing agreement.

Hermes Investment Management appointed a research director, Orla Murphy, to oversee procurement and manage the research budget.

Others have to make similar decisions quickly as they must demonstrate the value of research to clients, Malkan says.

‘Time is very limited for the asset managers. The key point is urgency. If they want to use their clients’ money to pay for research, they need to set a budget, define providers, valuation methodology and get investor sign off.

‘If at Christmas asset owners reject research budgets, they will have to go to the P&L and they will struggle to be compliant or pay for research.’ 

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