Mifid II  

Mifid II fallout over fund research fees predicted

Mifid II fallout over fund research fees predicted
Credit: Carl Court/Getty Images

Mifid II's push to separate investment research from trading could cause a "significant fallout" that will hurt independent firms, Chris Darbyshire has warned.

The chief investment officer of Seven Investment Management (7IM) said Mifid II could create a depolarisation of investment research and the demise of some independent firms. 

He claimed the large investment banks will be able to package up their research costs with other services, while independent research houses will struggle.

Mr Darbyshire said: "We expect significant fallout from Mifid II, possibly leading to material reductions in pricing, the demise of industry players - including personnel, departments and possibly entire firms - and the eventual restructuring of the research industry around a new business model."

He explained that Mifid II, which is coming into force in January 2018, will put great pressure on firms to be clear about how they pay for research and whether they pass this onto clients.

As a result, he said: "For the first time, banks will be forced to charge explicitly for their research.

"Overnight, their business model will move from one where research is integrated with execution of trades to one which competes directly with the far-smaller independent research industry.

"Few fund management houses will want to bear the whole cost of research themselves, but they may also not be willing to charge it explicitly to their funds.

"There is a distinct risk that research budgets shrink, and research departments with them."

But Mr Darbyshire added: "Our customers won’t see any impact on fund costs as these are already absorbed directly by 7IM; we must ensure that these changes do not reduce the quality of our internal research or the decision-making that it drives."

He said: "Being larger and offering more company-specific services, investment banks may be able to package up their single-stock coverage with their top-down research services.

"This will threaten the top-down independent research houses, who will be forced to rely on their clients’ existing contractual obligations and their greater expertise in a narrower range of disciplines."

He said the "coming battle" reminded him of the entry of Premier League and Championship teams into the third round of the FA Cup. "The bulge-bracket investment banks provide research on thousands of companies worldwide, plus hundreds of national economies, industries, currencies and commodities.

"A bulge-bracket investment bank might employ close to a thousand people in research, whereas even the staff of large independent research houses are numbered in the tens. It will be behemoths versus minnows."

7IM has never charged research costs to its funds, either explicitly or implicitly through execution costs and, according to Mr Darbyshire, has always paid investment banks for their execution abilities rather than for their research.