As of 3 January 2018, the price for investment research provided to any asset manager in Europe must be agreed and paid for. Under MiFID II, research and trade execution payments must be unbundled to ensure there is transparency over payments. Brokers are no longer be able to charge a bundled execution rate, which the portfolio manager agrees and passes on to their clients as trading costs.
As the financial industry is global, this practice has spread to other jurisdictions. In the US, market regulator the Securities and Exchange Commission has issued three no-action letters to ensure that US sell-side firms can sell research without becoming investment advisers. Under existing rules, US firms now need to support the European model, providing customers with a single service model across the US and Europe.
Within firms this creates an operational challenge. They either set up research payment accounts (RPAs) in order to explicitly fund payments for their clients, either pre-funded or billed, or they absorb the costs for research on their own P&L account.
Of these options the latter is preferred. Only five investment firms said they are passing on the cost of research to clients - the majority are paying themselves. Up until 3 January 2018, the most experienced firms have been using commission sharing agreements (CSAs) to fund that research through a portion of commissions. This means that new processes are required for allocating and making payments.
We have looked at the challenges – and some possible solutions – for setting up research payments post MiFID II on both the buy- and sell-side in our paper, ‘Surviving MiFID II – Predictable yet unexpected risks’.
In it, we address the issues of tracking consumption, assigning payment and tracking return on investment to provide a feedback loop which will allow asset managers to bring commercial pressure to bear on research providers, whoever is paying.