New Regulation Will Drive Down Investment Fees

New regulation MIFID II is driving further focus on costs and transparency - good news for investors but a challenge for providers

Morningstar 20 February, 2017 | 2:10PM
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Confused by the latest investment regulation? We’re here to help. The Markets in Financial Instruments Directive (MiFID II) comes into effect January 2018. Described as a single rule book for financial institutions in Europe after an era characterised by conflicts of interest, the Directive aims to increase investor protection, transparency, product standardization and financial market stability.

For asset managers, MiFID II is driving further focus on costs and transparency. MiFID II’s unbundling of payments for investment research will prohibit asset managers from receiving research as a ‘free’ added-value service on the back of commissions paid for broker and investment banking services such as trading and execution. Instead, asset managers will be required to explicitly cover investment research costs from a separate account, or from their own profit and loss account, making the cost of research highly visible and forcing asset managers to better define and ascribe value to their research budgets.

Which Fund Providers Will Be Most Affected?

Mid-sized asset managers in Europe, and particularly those with limited resources yet wider research needs than more niche players, are likely to feel some cost pressures from this change. Less able to absorb research costs into their general business profit and loss accounts, the new transparency around investment research may deliver a disproportionate effect on their business models and we can therefore expect asset managers to make more considered and value-based choices when selecting their research providers, be they internal research teams or independent third-party providers.

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