The deadline for implementation of the European Union’s Markets in Financial Instruments Directive (MiFID II) is just a few months away, but most asset managers (AMs) are undecided on crucial facets of the new regime, a survey of 92 global AM by CRISIL Global Research & Analytics (GR&A) shows.
AMs have been seeking an active role in trade implementation and gravitating towards holistic best-execution analysis to accommodate new asset classes, especially fixed-income products. Many prefer in-house reporting and subsequent transmission to a single Approved Reporting Mechanism (ARM). Firms are also augmenting their internal technology stack, evaluating the right third-party reporting tools, and realigning work flow to achieve accurate and near-time reporting.
“While many AMs have indicated that they would significantly reduce external research budgets, we believe the benefits of the move would be partly offset by the cost of augmenting in-house research teams,” says V Srinivasan, President, CRISIL GR&A. “We believe only firms that deliver material efficiency gains in research procurement and consumption will be able to minimize the impact of unbundling on profitability.”
CRISIL GR&A sees five key shifts as AMs unbundle their research function:
- Research costs will get absorbed eventually, driven by investor and peer pressure, and regulatory nudges
- External research budgets will be slashed 15-30%
- Internal research budgets will increase 10-15%
- Engagements with bulge-bracket banks will reduce to below 5 compared with a lot earlier, and more specialist/regional players offering specialized research and flexible pricing will be signed up
- In-house fixed-income research teams will continue to be beefed up.
“Active AMs are understandably focused on reducing costs to minimize the impact of research unbundling. However, it is equally critical to focus on alpha-generation opportunities as investors would eventually choose those that generate superior fee-adjusted returns irrespective of who absorbs the research costs,” Srinivasan added.
CRISIL GR&A believes AMs should focus on four critical aspects when preparing for MiFID II:
- Marry operational compliance to best practices and ensure value of adherence to asset owners
- Finalize a balanced research-sourcing mix that enhances value and minimizes cost
- Accelerate investments in data analytics and alternative data for differentiated insights, andAccelerate adoption of advanced technologies to enable all-round efficiencies.