Banks and brokers are locked in a cut-throat price war that has sent the cost of investment research plunging, raising concerns that asset managers could breach EU inducement rules if they agree to pay extremely low prices.
From January, asset managers will be required to pay banks and brokers directly for analyst research instead of the current practice of combining the cost with trading commissions.
The change, one of the most hotly debated under Europe’s forthcoming Mifid II legislation, has prompted frantic negotiations over the price of research. Many fund managers are pushing back on the initial offers they received, according to people involved in the negotiations.
As the deadline fast approaches, some large banks have been accused of predatory pricing in order to squeeze rival research providers out and win market share. The price slide has been exacerbated by an industry-wide trend among asset managers to cover the costs out of their own pockets, rather than passing them on to investors.
“We are in a deepening price war,” says Benjamin Quinlan, founder of Quinlan & Associates, the Hong Kong-based consultancy. “For the last three months of this year, we are going to see more managers opting to pay out of their own profit and loss accounts, which will further drive price compression.”
Last month, several large asset managers, including Schroders and Janus Henderson, backtracked on an initial decision to charge investors for research, after BlackRock, the world’s largest asset manager, said it would absorb the cost.
Many asset managers are likely to tighten their research budgets as they move to this model. Analysts at Credit Suisse say they expect asset managers’ research budgets to shrink by half as they aim to keep incremental costs associated with the changes at less than 3 per cent of pre-tax profit.
Capital Access Group, which advises companies on how to engage with investors, estimates the UK’s total fund management budget for research will fall from around £200m this year to £90m in 2018.
To keep their institutional clients on board “some of the sellside players are pricing as low as their compliance teams will let them”, says Chris Brown, chief investment officer at IPS Capital, a boutique asset management firm.
“The sellside is not thinking of this as a profit centre, they are thinking about this as part of a broader relationship — and they don’t want to be pricing themselves out of the market.”
While cheaper research will be welcomed by some, there are regulatory dangers surrounding a race to the bottom, experts warn.
The rules stipulate that investment managers should not receive anything that might be considered an incentive to trade with a particular bank or broker.
“[The low pricing] has raised concern on the buyside about the inducement rules,” says Owen Lysak, a partner at Clifford Chance, the law firm. “Is it so low that you can’t argue that the sellside is covering its costs? The buyside has become more focused on this over the past few weeks.”
The all-in price of research at some of the biggest banks, down from $2.5m-$4m
A spokesperson for the FCA, the UK regulator, told the Financial Times that investment managers must “make sure that the research they receive, including the price they pay” does not breach inducement rules. However, if the rules mean “customers are paying less for the same or better service, that is a good outcome”, the spokesperson added.
Not everyone is complaining. In some cases, fund managers themselves are urging banks to reduce prices by citing the lower charges of their competitors, according to two senior bankers involved in negotiations.
Over the past six months, the back and forth has broadly pushed the all-in price of research at some of the biggest banks down tenfold, from between $2.5m and $4m to as low as $250,000, according to another person close to the discussions.
EuroIRP, the trade body for European independent research providers, said prices for reports-only research from investment banks had broadly fallen from around £200,000 to as low as £50,000 over the same period.
JPMorgan is understood to be making an offer as low as $10,000 for access to its equity research. JPMorgan declined to comment. Several banks — including Credit Suisse, BBVA and NatWest — have said they intend to use a complex carve-out in the regulations to provide some or all of their economic and fixed-income research for free.
Some argue that this particular approach is also legally risky. Mark Wade, head of industrials and utilities credit research at Allianz Global Investors, says the company is seeking a legal opinion to establish whether the low price tags for fixed-income research constitute inducements.
“We have been looking for a market standard, but it keeps changing,” says Mr Wade. “It’s not easy when the groundswell around you is moving.”
Other fund managers are worried about the broader impact of the pricing shake-up for the industry.
The changes could knock revenues at research providers without deep pockets — from mid-tier banks, to small-cap stockbrokers and independent researchers — and are predicted to cost analysts’ scalps.
Carmignac, the €61bn investment house, recently told the Financial Times that smaller fund manager budgets could damage the quality of research and result in investment banks scrapping their coverage of some companies. This, in turn, could harm investors in the long run, it said.
But others say that, overall, the price correction is welcome. “The price [of research] has come down to more realistic and more affordable levels,” says Mr Wade. Compared with initial offers “it is more appropriately priced than it was”, he adds.
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