Regulation  

Quarter of fund houses to absorb research costs

Quarter of fund houses to absorb research costs

A quarter of wealth and asset managers will absorb research fees in the advent of Mifid II rules banning the bundling of broker trading and research costs, a survey has shown.

The European Commission confirmed last month that research and trading costs for investment firms must be separated under Mifid II rules due to come into force in January 2018.

A quarter of delegates at an EY industry event said they would now absorb research costs instead of passing them onto clients in an unbundled form.

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But some 46 per cent said they were undecided on how to approach the rules while a fifth said they would continue to pass research costs onto clients, albeit in an unbundled format.

Investment research used by fund managers is typically bundled together with the fees they pay brokers to trade stocks, and the separation of the two processes has become a bone of contention within the industry.

Investment Adviser found leading fund managers are reluctant to divulge plans over whether they will charge clients in future. Of the 42 firms contacted, just five were able to confirm their intentions.

Some firms have become adapting to the new environment in advance. In April, Woodford Investment Management announced it would absorb research costs, following in the footsteps of Scottish firm Baillie Gifford.

Meanwhile, Legal & General Investment Management (Lgim) unbundled commission paid to brokers as of April 1. Instead, the firm will give its equity funds a fixed research budget, paid for by an additional 10-15 basis point charge to clients.

EY’s research also showed two-thirds of respondents were unsure over whether to continue using commission sharing agreements (CSAs). The process, which allows a broker executing a trade to pass part of the commission to a third-party research firm, may yet be permitted by the Mifid update.

Some 15 per cent of respondents said they would continue using CSAs, but 18 per cent said they would not.