10 November 2017

Research Budgets Expect to Decrease by Only 1% in the Next 12 Months

Although some industry experts are projecting that new MiFID II rules will reduce buy-side spending on equity research by as much as 40%, a new study from Greenwich Associates finds that the immediate impact will be much less dramatic: European institutional investors plan to cut research budgets by only 1% in the next 12 months.

With MiFID II, regulators are attempting to bring transparency and accountability to the market for investment research. Under the new framework, asset managers and other institutional investors will have to make discrete payments for research, either from their own balance sheets or through new research payment accounts (RPAs). In essence, regulators are trying to “unbundle” research costs from trade allocations to the greatest possible extent.

With implementation looming, in Q2 of 2017 Greenwich Associates interviewed 164 buy-side equity traders and 198 portfolio managers in Europe about their plans for equity research budgeting and payments for the year ahead. In total, the group is planning a 1% reduction in spending—including both commission-based soft payments and hard payments taken from asset managers’ own P&L. That’s a smaller cut than investors were projecting last year, when participants in the study predicted reductions of 6%-7%. Institutions plan to reduce their use of investment bank research by 2%.

“Our research shows that the seismic disruptions that many expected probably won’t materialize in the early months of 2018,” said William Llamas, Greenwich Associates Relationship Manager and author of a new report, As MiFID II Looms, European Fears Subside. “Immediate, substantial decreases will indicate to regulators and clients alike that these managers were wasteful in their research spending in prior years.”

As of mid-year about one in 10 buy-side institutions plan to shift all research payments to “hard dollars” from their own P&Ls in the next year—a move regulators will undoubtedly applaud. “While other institutions have already decided to fund research payments with RPA-based payments, about two-thirds of study participants had not yet decided how they will pay for research under the new MiFID guidelines,” said Llamas.

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