Broker research costs for asset managers under the MiFID II regime could potentially reduce operating profits by almost 30%, research shows.
Under MiFID II – the Markets in Financial Instruments Directive II – asset managers are required to unbundle broker research costs from other services and either absorb research costs or set up a research payment account (RPA).
The cost of the RPA can be borne by investors but it will entail additional disclosure, budgeting, reporting and auditing.
Crisil Global Research & Analytics, part of Standard & Poor’s, said that most European asset managers would prefer to absorb research costs despite the hit to operating profits. Most asset managers would want to avoid the “strenuous” process of setting up RPAs, Crisil said.
The firm has drawn up various scenarios and shown the impact of absorbing research costs for each. In one case, assuming an asset manager’s exposure to equities is 35% of total assets, 80% of equity research costs are borne by the manager with the remaining 20% absorbed by brokers. This would lead to a 17% decline in operating profits.
Under the firm’s bear case, operating profits will decline 29%, assuming asset managers have a 40% exposure to equities and the entire research costs are borne by them.
Although MiFID II is a European directive, it will also impact US asset managers who will also have to implement unbundling for their funds registered in Europe.
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