Regulation in the investment industry normally equates to two things. Firstly, it is seen perhaps as a necessary evil – necessary, because markets must be fair and transparent to foster confidence and trust from investors; and evil, as regulation is perforce accompanied by administration and complexity.
Second, regulation is hardly something that gets the blood racing – it’s not why we get up in the morning, is it?
But the impact of regulation, specifically the European Commission (EC) rules under the Markets in Financial Instruments Directive II (Mifid II), really could matter for both wealth managers and their end investors. Running money for those investors, and providing intelligent advice, is of course what wealth management is all about. In doing that, the depth, range and quality of market insights and research from brokerage firms plays a pretty fundamental role in the investment decision process.
The Mifid II rules, which will come into effect across the EC in January 2017, cover a multitude of sins, and carry with them a real change in the way such research services are paid for and the clear possibility of much-reduced coverage and availability of these services. Put simply, under Mifid II wealth managers, in common with all buyside firms, will have to budget and pay for all research – from brokers, independents, or whoever – as a distinct separate charge, which is not related to or bundled with trading commissions in any way at all.
Much of the initial impetus for separate research payments comes from the Financial Conduct Authority (FCA), with the irrefutable aim of making the cost of research more transparent and reducing unnecessary costs for end investors. Given this, although there is still debate on the final wording of Mifid II, the position of the FCA is both clear and highly unlikely to change.
The FCA will be looking to asset managers to separate research and execution costs, and instead have distinct research budgets, which will lead ultimately to greater transparency and lower costs for clients. So wealth managers in the UK and, by extension, advisers, will definitely be affected by whatever changes in the scale and range of brokerage research that emerges as a result of Mifid II.
Wealth managers value independence of thinking most highly when looking at equities, and when examining insights on UK small and mid caps it is the ability of brokers to deliver meetings with companies that is of most value. Now, of course, wealth managers will use their own skills and judgements in making investment decisions or recommendations for clients, but they do make extensive use of brokerage services as part of this process.
While it is too early to be prescriptive about what changes will occur, there are some key facts that are likely to restrict access to brokers’ ideas and insights. Firstly, asset managers are not waiting until 2017 before doing anything. Already, research budgets are being defined. However these may be funded, they will attract VAT (unlike trading commissions) and hence at least a 20 per cent reduction in spend to brokers can be anticipated. In this climate, brokers will cut their cloth accordingly.
