French firms consider how funds will pay for research

broker researchFrench asset managers are “considering” displaying their broker research fees for Ucits funds separately to execution fees so they meet new rules on unbundling.

ITG, a broker, found 56% of 87 asset managers it polled would consider the move, while 27% did not know.

Asset managers traditionally bundle the costs of broker research with other broker payments, such as execution in the case of equities – but MiFID II will force firms to be more transparent and separate these costs.

One commentator said there was “no considering” about it once the updated MiFID – the Markets in Financial Instruments Directive – becomes effective on January 3 next year.

Richard Phillipson, principal at London-based asset management consultancy Investit, said: “Unbundling is what they will be doing in 2018 if the regulator enforces the regulations.”

ITG polled the firms at an event in Paris this week. The firms were asked if they would “extend” the unbundling rules to collective funds.

Institutional investors that use MiFID firms will be able to stipulate whether they are prepared to pay research costs for their segregated mandates, or whether firms themselves should foot the research bill.

The poll raises the issue of how funds will be treated. The issue is racked with conflicts of interest if the decision on payments is left to fund boards, which are usually top heavy with representatives from the sponsoring management firm.

Just over a quarter said they would continue to charge 100% of the research costs to their clients, but 18% will be paying it from their own coffers.

Some other findings from the ITG conference were:

•   89% of the firms were in the preparatory phase for MiFID II; 3% were ready and 8% said they had not started
•   11% were still not clear whether MiFID II would also apply to smaller asset managers
•   60% were waiting until the official launch date to implement unbundling

David Angel, head of ITG France, told Funds Europe: “We were surprised that as many as 18% of asset mangers said they would start paying for research out of their own P&L. That's not something that many in the industry have been vocal about, and both the French asset management community and the regulator have been enthusiastic about CSAs [commission sharing agreements].”

The number of managers paying for their own research could increase if institutional clients demand it, said Angel, though CSA and other approaches could “tempt some away from the idea”.

ITG, which hosted its event with equity research house AlphaValue and consultancy FinFees, said there was no proportionality for small asset managers. The firm also said that defining research as a priced service remained a “big challenge” between asset managers and research brokers.

©2017 funds europe

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