The impact of Mifid II on management fees will be bigger than the impact the Retail Distribution Review had in the UK, according to research from ratings agency Moody's.
In an eight-page report, the ratings agency said the regulatory overhaul with Mifid II will accentuate every trend hitting the industry today: accelerating a move to cheaper passive funds, sharpening competition and driving sector consolidation.
Moody's warned strict Mifid II disclosure requirements for costs and charges, and new product governance rules, will make it easier for investors, independent financial advisers and competitors to compare investment products.
As a result, Moody's estimated asset managers' effective fee rate could fall 10 per cent to 15 per cent over the next three years.
The report said: "Given its broader scope, we expect the impact of Mifid II on management fees to be bigger than the impact the retail distribution review (RDR) had in the UK.
"Post RDR, between 2013 and 2015, ongoing charges for active funds came down marginally, while for more transparent passive funds, charges came down between 15 and 20 basis points.
"Mifid II will affect active management as well as institutional assets, and European asset managers' effective fee rates could fall 10 per cent to 15 per cent as a result, depending on their asset allocation and on their responses to ongoing pressures."
According to Moody's asset managers will likely respond by narrowing the range of products they sell, and will likely be forced to consider closing funds that have been consistent underperformers.
Such measures, along with cost saving initiatives, innovative investment solutions and possibly mergers and acquisitions, will offset some of Mifid II's negative effects, limiting their credit impact, Moody's added.
The report stated: "A winnowing of funds is already under way in response to investor disappointment with active management performance.
"The European fund industry has lost about 3,000 funds over the last six years. The perception of underperformance was reinforced following a European Securities and Markets Authority (ESMA) survey in February 2016, which concluded that between 5 per cent and 15 per cent of the 2,600 European equity funds analysed could be more accurately classified as index-tracking funds.
"In the post-Mifid II era, investors will no longer tolerate such benchmark huggers."
Paul Stocks, financial services director at intermediary Dobson and Hodge in Doncaster said: "It is still early into Mifid II and therefore I suspect things will evolve as time moves on.
"I do hope that, in time, the total cost of funds can be established to put an end to the debate as to the extent charges are hidden."
On the subject of the increased popularity of passive investments, he said: "We believe that a well-managed active fund can outperform, net of charges, the market as markets are not fully efficient and also asset allocation calls can be made to reflect the macro."
david.thorpe@ft.com
