Research costs is another area being brought to the fore by Mifid II.
On the face of it, this seems only to affect wealth managers or fund providers, and how they purchase and use third-party research.
However, until earlier this year, the majority of advisers and their clients had no idea how much fund managers were paying for third-party research, and therefore had no idea how much of this expense was being absorbed by the provider – or passed onto the client through higher fees.
Now, Mifid II requires the unbundling of research and greater transparency on costs, so that investment firms can show they are not being induced to trade.
They will, from 3 January, have to put in place systems that can manage unbundled payments for execution and advisory service, and be able to show the research and pricing models for those services.
Sell-side firms (those providing research, such as investment banks, stockbrokers and market makers) must also disclose all the associated costs and charges to buy-side firms (fund managers, asset allocators, retail and institutional investors) so the latter can demonstrate they are acting in the client’s best interests, and have not been induced to trade.
In its 2016 paper on Mifid II’s requirements for research, PricewaterhouseCoopers outlines five core implications. These are:
• Sell-side firms must not induce clients to trade by bundling research within their execution services.
• Sell-side firms are required to review and identify services provided that could be categorised as research, and therefore for which payment would be required.
• Sell-side firms need to provide clients with unbundled costs of trading, separately identifying and charging for execution, research and other advisory services.
• Buy-side firms have to make explicit payments for research, and demonstrate that research contributes to better investment decisions, and is therefore not an inducement.
• Investment firms must provide better reporting to facilitate payments being made for research, and to help demonstrate the value that research is providing.
Linda Gibson, director of regulatory change and compliance risk for BNY Mellon’s Pershing, claims Mifid II will “govern the way wealth managers purchase and use third-party research".
“The increased transparency heralded by research unbundling not only changes the way advisory firms budget for research services, but also puts greater scrutiny on demonstrating the value of such services to investors.”
For advisers, wealth managers and discretionary managers, this means they need to develop more robust quality criteria, which will help them assess the value of any research they receive, and how it will contribute to better investment decisions.
According to Susann Altkemper, counsel for law firm CMS: “Advisers should benefit from more efficient price information, as research providers will increasingly look to differentiate themselves from other providers, and price their research competitively.”
However, this is going to be complicated, and advisers and providers will have to work better together to make any cost transparency meaningful to the client.