Asset management giant Vanguard has become the first large US investment firm to decide it will pay for analyst research out of its own pocket rather than pass the cost on to investors in its funds, according to a report in the ‘Financial Times’ today.
The $4.4 trillion (€3.7 trillion) Pennsylvania-based fund house, the world’s second largest, has said it expects to pay less than $5 million a year for external analyst research from its own profit and loss account, in a move that is likely to put pressure on rival firms to follow suit.
The decision comes ahead of the coming into force, from January 2017, of the second iteration of the EU’s Markets in Financial Instruments Directive, known as MiFID II, which will put an end to the common industry practice of investment firms giving away research for free in return for fund managers placing trades with them.
So far, several European asset management firms, including Aberdeen Asset Management, Baillie Gifford, Jupiter and M&G, have said they will absorb the cost of research themselves.
Others, such as Amundi, Invesco and Schroders have said they will set up new administrative structures known as research payment accounts, which will monitor fees paid out of investors’ funds.
Chris Turnbull, co-founder of Electronic Research Interchange (ERIC), which describes itself as a free marketplace for sellers and buyers of research, said that Vanguard’s decision to cover the cost of its investment research was an important reminder to other asset managers of the need to act on unbundling.
“Unfortunately, the majority of managers will not have the same capacity to pay for investment research as Vanguard,” Turnbull said.
“Small and medium-sized managers are the group most likely to be impacted, and least prepared, for the new unbundling rules. With limited time to make decisions on the future of their investment research procurement, many managers will be looking across the industry for examples they can follow.”
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