The Markets in Financial Instruments Directive (Mifid) rules have caused a "shakeout" of small and independent research providers in the investment industry, the CFA Institute has warned.
The unbundling of research costs was a component of the Mifid II rules introduced in January 2018, which requires financial services firms to disclose a breakdown of all costs and charges associated with a client’s investments on both a forecast and actual basis.
In its latest survey of more than 500 European portfolio managers and analysts, the first since the introduction of the Mifid II rules, the CFA Institute has warned research providers have "weathered a shakeout" as investment managers sought to "re-calibrate" their needs under the new regime.
Of the investment professionals surveyed 57 per cent of portfolio managers reported sourcing less research from investment banks than before MiFID II, with research providers feeling the squeeze of a more competitive market.
Rhodri Preece, head of industry research at the CFA Institute, said: "MiFID II has brought transparency and competition to the investment research business.
"But as asset managers have absorbed research costs, we have seen a notable reduction in research budgets that is causing a shake-out among research providers."
The CFA Institute also found research budgets had been scaled back in the last year, with the largest firms making the biggest reductions.
The survey showed the average budget decrease for research was 6.3 per cent, but this increased with firm size with those managing more than €250bn (£219bn) of assets were witnessing an average budget reduction of 11 per cent.
The institute attributed this sliding scale to larger asset managers being more likely and able to relocate research production in-house as they scale back business with external providers.
Mr Preece said: "Independent and sell-side research providers are under pressure, which we see translating into reduced research coverage, particularly in small and mid-cap equities, and fewer sell-side analysts."
Last month traders warned the impact of Mifid II may have already done permanent harm to the markets, with claims the unbundling research costs have "significantly damaged" the quality of research and market competition.
Daniel Schlaepfer, president and chief executive of trading company Select Vantage Inc, said unbundling research costs has forced fund managers to drastically cut their spending on research, and most of them were now opting for larger research providers at the expense of independent specialists and smaller research firms.
rachel.addison@ft.com
