It would appear, after recent ‘polls’ (and we know how horribly unreliable they are), that many buy-side firms are now considering ditching any thought of paying for research through commissions and also dropping the implementation of the new Research Payment Accounts (RPAs) to support any payment mechanism between the firm and the research providers.
According to a poll at a recent buy-side forum, run by Bloomberg Trading Solutions in May in London, as many as 41% of firms were considering paying for research directly out of their management fees. This compared with 44% opting to use RPAs funded by trading commissions and 15% using separate client charges into RPAs. This is quite a sizeable percentage, and an increase from the 28% who opted for this approach when they were asked the same question at another Bloomberg conference at the beginning of the year.
If this trend continues, then it’s not unforeseeable that the majority of firms will be going the ‘management fees’ route by the time MiFID II comes into force, mainly due to the sheer complexities of implementing RPAs, across multiple funds, multiple trading strategies, etc. It’s not difficult to have some sympathy with the fact that many have just had enough – the delays, the changes in the specifications and the uncertainties of exactly what is, and what isn’t, allowed.
The outcome of this approach is not completely clear, but one can surmise with a fair amount of confidence that this will impact a number of areas:
- Management Fee Levels. It is difficult to see how these wouldn’t increase. If I was a client and my fund manager admitted that they could pay for all research payments from existing fees, then I’d possibly consider that their profit margins were a little high to begin with. As a client, I think I would expect an increase in fees, which would, of course then be offset by a reduction in the level of trading commissions I’d be paying.
- Research Consumption. Without doubt, if I was no longer using clients’ commissions to pay for research and having to use my own money, in the form of management fees then I, as a fund manager ,would have to think long and hard about how much research I would take, and from whom. The result, borne out by recent ‘polls’ is that many firms think that the total amount paid for research will decrease as a result of this. And this leads on to the final area.
- Technology. Without the need for complicated “commission splitting” tools, or multi-client, multi-fund RPA management facilities, my IT requirements would be much simpler and, consequently, much cheaper. What would I need? Well, if I was using management fees to pay for research, then both myself, and my clients, would want to feel confident that I was taking the right level of research, from the best sources and distributing the correct allocations from my research budget. Simply put, I would just need a robust research evaluation tool that could then allocate a research budget across the various providers.
And for me, who is almost old enough to remember quills and parchment, the biggest irony is that this was all suggested years ago. Back in 2001 Paul Myners suggested all this in his report to HM Treasury. Strange that it’s taken 15 years for the market to agree with him. Moreover, one of the optimum solutions to all this may, in fact, be one of the simplest and cheapest of all. As the say, “Keep It Simple”, etc!
- 30 Jun, 2016
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- MiFID, Research, RPAs,