Research unbundling is the way forward, but challenges remain
The recent Investment Implementation conference heard that of all MiFID II components, research unbundling is the requirement most likely to result in tangible results. Conference participants highlighted the ability to select brokers based on their ability to optimise execution as the area where most significant gains can be made.
While not a regulatory requirement, a number of local asset managers including AMP Capital are now fully unbundled, while others are in the process of doing so.
Thomson Reuters is working with a number of asset owners and asset managers to implement research unbundling programmes in Australia. Nathan Walker, Head of Market Development, Buy-Side Pacific at Thomson Reuters said that while some asset managers were choosing to wait until their clients demanded change, others were already taking steps to implement systems to measure and analyse research interactions with the global sell-side.
“Australia is not in scope where MiFID II research unbundling is concerned, but best practice is expected and it will be driven by asset owners. We have spoken to many asset managers [who] are sitting on the fence at the moment, saying ‘well the regulator isn’t asking us to do anything, I will move when the asset owner tells me to move’. At the same time though we are seeing large global asset managers who provide transparent reporting in Europe roll out the same standards in Australia. That is happening in real time, both in terms of research and trading, so that process is definitely underway,” Walker said.
Best practice is expected and it will be driven by asset owners...that process is definitely underway.
Research unbundling is also seen to have a positive impact on the trading profession more generally, by lifting the value of trading across the organisation. “While it is empowering from a trading desk point of view to have the [unbundled best execution] mandate, [this carries] not just the ability but the obligation for price to have primacy in terms of how you go about filling your orders, unpolluted by other factors from days gone by such as “who put out a piece of research most recently,” Joe Kassel, Global Head of Dealing & Exposure Management at AMP Capital said.
However, the changes are not without challenges. Smaller asset managers are likely to feel the pinch of the new requirements, particularly where the costs of implementation are concerned.
“If you’re a small cap manager, the fact that at some point you may have to use your own P&L to pay for research is going to be tough, and then to pay for the market data and the compliance costs on top of that is a huge cost to a small organisation,” Emma Quinn, Global Co-Head of Equity Trading at AllianceBernstein said.
“One of the unintended consequences that the [Financial Conduct Authority] has noticed in the UK has been the merging of asset managers, because scale is going to matter in this business,” Quinn said.
“For smaller and newer asset managers and brokers, the challenges are going to be greater because while their fees are going down, their costs are going up. Of course, those of us with sufficient capabilities and infrastructure have the means to manage incidental costs, but fixed costs are the same whether you manage $10 billion or $50 billion. So for those without the scale and quality systems, it is going to get harder,” Jason Lapping, Head of Asia Pacific Trading at Dimensional Fund Advisors said.
Nathan Bode, principal consultant at Frontier Advisors also flagged what he referred to as “serious concerns” about the impact that the research unbundling process could have on smaller managers.
“There is a possibility of smaller investment managers struggling or being discouraged to launch, leading to less innovation, less new entrants and ultimately less competition. This is a serious concern for us and this is an area that we will be monitoring closely as it will have an impact on the quality and potentially other aspects like fees paid by our clients, the asset owners. Perversely it may mean that fees or costs may not come down as quickly as we might have liked to see, so that is something that we are paying close attention to,” Bode said.
Teaming up with other boutiques in an umbrella structure to jointly manage costs wouldn’t necessarily resolve these challenges Bode said. “Valuing research is difficult for any boutique, but when you have a multi boutique structure and you have the research spend controlled by the [umbrella organisation] that becomes incredibly difficult in terms of one valuing it and two deciding what you spend your research budget on,” he said.