Leading fund managers have been accused of “locking down the hatches” over the disclosure of research costs rather than join the handful of groups that have set out more transparent charging policies.
Last week, Woodford Investment Management announced it would bear the costs of paying for broker research itself. It will also disclose transaction costs on a monthly basis, in advance of Mifid II regulations that will sever the link between the two types of payment.
The firm has followed in the footsteps of peers such as Baillie Gifford and Legal and General Investment Management, which have recently announced their own plans. However, several years after the Mifid II rules were first proposed, the majority of fund groups are still unwilling to speak on the subject.
Of the 42 firms contacted by Investment Adviser, just five were able to provide details of their plans on the matter.
Commentators suggested commercial sensitivities, regulatory pressures and a feeling that the old regime had become “indefensible” were preventing an open discussion.
Daniel Godfrey (pictured), former chief executive of trade body the Investment Association, said: “It’s sensitive because the current model is, I think, indefensible.
“Rationally, it’s not a sensible model from the perspective of clients’ interests, and the arguments that have been deployed to try to defend the model are just extremely weak and don’t really stack up.
“There are a number of people in the industry that privately recognise that it’s a bad model, but there’s a belief that evolving away from the current model could be financially very painful.”
Some asset managers pointed to uncertainty over the exact form of the Mifid II rules due to come into force in 2018. But last week brought further evidence that European regulators will not waver in their attempt to force firms to pay for research and transactions separately.
Rob Moulton, regulatory partner at law firm Ashurst, noted that firms could, for example, pay the costs themselves, implement a cap on overall research expenditure or ask clients to contribute to a separate account used to pay for research.
“If you were trying to guess the very slow direction of travel, there’s a drift towards Woodford’s approach,” he added.
Alistair Haig, a research fellow for the University of Edinburgh Business School, said: “It’s not that there’s one right model. You could use the Woodford model or you could treat it like L&G and put your fees up.
“[But] people have really locked down the hatches.”
Three firms, three approaches
Majedie
Majedie has disclosed research and execution costs in quarterly reports for the past three years.
It also provides a breakdown of all fund charges on its website, listed by share class and broken down into execution costs, research costs, and tax.
Baillie Gifford
Baillie Gifford adopted an “execution approach” to trading at the start of 2016, meaning it pays for research costs rather than clients.
Dealing commission charges levied from January 1 onwards include the cost of trading in stocks but no other services provided by stockbrokers.
Legal and General Investment Management
LGIM unbundled commission paid to brokers as of April 1, instead giving each of its equity funds a defined research budget. The costs of these budgets have been incorporated in the firm’s fixed ‘fund management fee’ for each product. In most cases this has resulted in charges rising by 10-15 basis points.
EU proposals confirm full unbundling
The European Commission published its long-awaited draft rules on dealing commissions last week, confirming it intends to separate research and trading costs under Mifid II.
The proposals give fund groups the option of either paying for research themselves – a method that has been adopted by Baillie Gifford – or creating a separate “research payment account” with a predefined budget that is charged to the end client – similar to the process now used by Legal & General IM (see below).
“Commission-sharing agreements”, which allow a broker executing a trade to pass part of their commission to a third-party research firm, may yet be permitted. But Vicky Sanders, co-founder of research marketplace RSRCHX-change, said the thrust of the rules was obvious.
“The rules are clear that research must now be separately priced from execution. Research unbundling is happening. It’s a tectonic shift.”
TIME TO PREPARE
2001
Year of the Myners review, which described bundled commissions as a “market distortion”
2018
Year in which Mifid II proposals come into force
