Four months to go until the long-feared introduction of Mifid II, and decisions on who will pay for fund managers’ use of investment research are finally being taken. The early signs are that some fund firms could be caught out.
Businesses have only recently given serious thought to a change that was first announced several years ago. In May, Investment Adviser reported regulatory consultants’ belief that many asset managers had left it too late to agree a plan of action in time for the January 1 2018 deadline.
Fund groups claim they have been waiting for more flesh to be put on the bones of the Mifid II proposals. The principle decision affecting fund buyers required no such detail: it was simply a case of asset managers stating whether they would wear the costs themselves or pass them on to clients.
Motivations for staying silent were likely a result of wanting to see which way the wind was blowing before setting sail. As a growing number of businesses now opt to pay for research costs, those who have made the alternate decision may be finding the water decidedly choppy.
This month has provided an indication that something of a consensus may be emerging. Faced with the alternative of ensuring research payment accounts can be charged to clients, the first two weeks of August have seen Vanguard, JPMorgan Asset Management and Pimco announce that they will take charges onto balance sheets.
There’s some reporting bias in this assessment, of course: firms that choose to absorb costs are happy to proclaim the fact; firms that do not are hardly likely to follow suit. There is good reason why most the businesses that are known to be intent on charging clients – such as Janus Henderson, Invesco and Schroders – are publicly listed. They are subject to greater attention than their privately held peers, and their intentions were sounded out on analyst calls or in results presentations.
Be that as it may, their decisions must stand up to scrutiny. Morningstar’s Christopher Traulsen wrote in these pages in April that investors “shouldn’t stand” for charges being passed on any longer. It is hard to argue against the assertion that stock research forms a fundamental part of the active management process. If investors have not been paying for this as part of existing explicit fees, then what have they been paying for?
One counter-argument is that absorbing these costs increases the pressure on small fund firms in particular. But as more and more firms choose not to charge clients, Henderson, Invesco, Schroders et al risk finding themselves increasingly isolated.
In itself, this may not have any impact on business. Yet these costs will now have to be added to headline fund charges for investors. The real challenge would lie in increasing these fees at a time of significant industry margin pressure.