MiFID 2 research payment model: the dust settles and ‘absorb’ wins
MiFID 2 research payment options: 'Pass on' or 'absorb'
Under MiFID 2 asset managers have two options for how to pay for third party research. Firstly, they can continue to charge costs for third party research to the fund, but this will require new processes (define budgets, assess quality, assure proper allocation). Let’s call this the ‘pass on’ option. Secondly, they can take the respective costs via their own P&L. We call this the ‘absorb’ option. The latter comes with less red tape, but will have a negative impact on margins (and the pot available for variable compensation). Unless, the asset managers can raise prices, i.e. the fees charged for investment management.
BlackRock and other key players opted for ‘absorb’ last week
JP Morgan AM and T Rowe Price have opted for ‘absorb’ in August already. In early September we then saw Allianz Global Investors and Northern Trust joining the ‘absorb’ camp as well. However, it really got interesting last week when Newton, Aviva and Standard Aberdeen, Deutsche Asset Management and Franklin Templeton all opted for ‘absorb’, and then on Thursday industry behemoth Blackrock announced to absorb costs for external research as well.
Then Schroders, Union, Invesco and Janus Henderson switched camp
This swift strengthening of the ‘absorb camp’ seemed to accelerate a reassessment at Schroders, Union Invesco and Janus Henderson. In any case all four of them then announced on Friday that they abandon their plans to go for the ‘pass on’ option and join the ‘absorb’ camp.
Quite lonely in the ‘pass-on’ camp now. ‘Absorb’ very likely to be the dominant model
There are still some sizeable players that stick to the ‘pass on’ option like French Amundi, BNP and Carmignac, German Deka and British Man Group. And there are also quite a number of very large players like Fidelity, UBS and Capital that have not communicated their decision. However, plotting the cumulated AuM of the firms that have opted for a camp already it seems to us that ‘absorb’ has strong momentum.
Additionally considering that advocating ‘pass on’ by now has become a PR & marketing nightmare we think it now is highly likely that ‘absorb’ will become the dominant model for paying third party research under MiFID2.
Impact: lower margins, higher prices, less brokers, more independent research providers
The outcome of this for the industry is not clear, but its ingredients are: It will be a mixture of lower margins (Oliver Wyman forecasts a drop in profits of 4-7%), consolidation in asset management, potentially higher prices for the asset managers’ clients, less brokers (as in many cases their costs for producing and distributing research are too high) and more independent research providers (low overhead, focussed on niches).
Next stop: Procurement of ‘corporate access’
Considering that MiFID 2 is only a quarter away and we have now quite some clarity on the prevailing payment model for research we expect asset managers and brokers to accelerate their research negotiations. We then expect that the asset managers (and their compliance officers) will have a closer look at how they source and (potentially) pay for the various forms of corporate access like roadshows, reverse roadshows and conferences they still might want to have in 2018.