If you were confused about the statement from Electronic Research Interchange (Eric) warning fund firms could be facing unexpected research costs, you are not alone.
The warning, made by former Standard Life Investment directors Russell Napier and Chris Turnbull, suggested that in the run up to the implementation of Mifid II in January, asset managers only did the bare minimum to comply with the new unbundling rules.
With the regulation having been live for a full quarter, Turnbull said the management at a number of firms will be discovering that they owe much more for research than they had anticipated.
‘I was a little surprised to read that,’ said Mike Webb, chief executive officer of Rathbone Unit Trust Management. ‘We are certainly not expecting a shock. We’ve put in an enormous amount of work in 2016 and through to 2017, to work with the sell side to determine which houses we would be working with and in what capacity, and modelling what those costs would be.’
He pointed out that while pricing for services from the sell side ‘will take time to settle down’, the prices that Rathbones has negotiated are contractual.
‘Over the next five to 10 years, I’m sure there will be shifts where people realise certain elements are more valuable than others,’ he added.
Webb highlighted that the process to prepare for the new rules and deciding what research to buy was an extremely long one. This involved determining what research the fund managers and investment managers throughout the group actually used and what value they attached to it. Then the group entered negotiations with those houses that added value.
He said he was not sure how asset management firms could end up with an ‘invoice shock’ as suggested by Turnbull, who had said that firms may be unaware of the full costs associated with broker interactions.
However, Webb admitted that there could be one area where fund firms could find themselves with a larger bill than expected and that is for specialist analysis. This might occur if the company is not controlling how that is used, particularly access to highly rated analysts.
For Webb, the more important issue than potentially unexpected costs, is the unintended consequences of the legislation.
He said: ‘To what extent can self-reliant brokerage houses justify the level of resources they’re pointing at specific parts of the market? Especially mid and small cap. To what extent can they continue to do that?’
Elsewhere, Anthony Scott, head of business development at Raymond James Investment Services and the man behind the creation of its ‘research hub’, believes if firms are surprised about what they have to pay, ‘they haven’t done their homework’.
‘All the conversations I had were clear. Some of them did say the read-only research was obviously at the lower end of the fee scale. The agreements I saw, they outlined what the higher tiers were. It was a certain amount of analysts and conferences.
‘I would hope people wouldn’t be surprised.’
Scott admitted that this is a new market for everyone, so it will take time to find its feet. And while from a research perspective it will be more expensive than last year, the costs should have already been factored in.
But he conceded that for those houses that have taken up free trials, the cost may come as a surprise.
Scott will be using this first year of Mifid II to also experiment and see what the wealth managers under the Raymond James banner use and value. In the research hub, the first time a wealth manager reads anything, they have to give it a rating in order to close the window. He says while this is quite simplistic, ‘it gives a qualitative aspect’.
That is also why he has used the trial period to try out a few new providers.
‘I’m keen for our wealth managers to get a chance to try out other people’s research as well so they can make their decisions. I think the regulator allowing the trial made a lot of sense to have a taste of something firms might not have used before. But people are much more careful in the way they allocate the budget,’ he said.
He warns however, that small independent houses may be at a disadvantage.
‘I think the price pressure is still out there for the sell side and the small boutiques have a more difficult time competing with people who have larger resources and selling premium packages, and their lower end packages are more of a commodity, which it is.
He added: ‘There are a lot of little things that worry me. It could be that if you’re a small investment house, you really can’t afford some of the research. That’s not going to be to anyone’s benefit. If homogenisation is going to be the way some companies move this is going to move it further down that route.