An interesting article from Emerging Manager Monthly
MiFID II Impact On Smaller Asset Managers Being Overlooked
December 7, 2017
The Markets in Financial Instruments Directive II law going into effect next month in Europe will have a greater impact on emerging managers than many anticipate, industry experts believe.
MiFID II, enacted to regulate how European asset managers pay for the research they use during the investment process, aims to create transparency for clients while transferring the cost of the research to managers from the clients.
However, many believe that the law is already impacting U.S. based managers handling non-U.S. strategies, particularly the smaller ones, as well as firms working with brokerage houses that are adopting the regulations on a global basis.
“The cost impact, I think, is being downplayed,” said Floyd Simpson, a manager research analyst at manager-of-managers FIS Group. “The smaller firms will end up having to pay for research and bear that burden.”
While MiFID II has its roots in greater transparency, the regulation will have a larger impact on smaller firms, and FIS Group recently published a paper that tackles the issue. It can be read here.
RVX Asset Management, which invests across the emerging markets asset classes, is one firm that has already begun to feel the impacts.
“For a small firm, it is increasing my cost base,” said Raymond Zucaro, cio of the Aventura, Fla.-based firm, noting that the firm anticipates having to pay $100,000 to $150,000 annually for research it had previously received as part of a bundled package. “That is two full-time employees. It is a real concern for me.”
The increased costs will force Zucaro to limit his budget to a select number of research firms, he said, noting that although the research does not directly result in portfolio decisions it is a valuable source of idea generation.
“By truncating or cutting off those avenues, that idea flow, the idea generation aspect, will be impacted,” he said. “If Citigroup tells me it’s a buy, I still do my own work. They have their view…the value-add is, ‘I agree with this point, not that point,’ etc.”
Paul Karrlsson-Willis, managing director of global equity sales and trading at minority broker-dealer Cabrera Capital Markets, said MiFID II is an “iceberg situation” where there are more issues that will arise for managers than what appears on the surface.
While MiFID II was primarily about transparency around research, it will also impact execution quality and trades, Karrlsson-Willis said. He also noted that he anticipates that there will be a shift in the type of research that is sought due to the cost shifts.
“I do believe you are going to see more selective research,” Karrlsson-Willis said, believing that the focus going forward will be on access rather than written research. “Why do I need to see someone’s writeup on a blue chip if I’m able to question the cio or ceo on where they are going. I’d rather do that myself.”
Cabrera is hosting a panel on Dec. 13 in Chicago on “How Will MiFID II Affect Public Pension Funds” to examine some of the aspects of the regulations.
“What MiFID II opened up was transparency around research. I do believe the buy side in the U.S. needs to be certainly aware,” Karrlsson-Willis said. “Size is always key. The smaller fund manager has a few issues to deal with, which impact them more so than the bigger guys.”
Barry Howard, founder and consultant at Howard Risk Associates, a U.K.-based financial services consultancy, said that the Securities and Exchange Commission and other U.S. regulatory bodies are definitely monitoring the regulation and talking with European and U.K. regulators about the benefits and potential drawbacks.
“A lot of this at this time doesn’t really affect the U.S. [in the short term]. Long term it will. I don’t even think it will be long term, only a couple of years,” Howard said.
Zucaro said that while the issue is on the back burner for U.S. equity and fixed-income managers, it is something all firms should be aware of and monitor.
“This has the potential to increase your costs down the line,” he said. “It is hard for me to sugarcoat this for smaller managers. I think it’s an issue. You can play it off and downsize it, but there is less free-flowing information and higher costs.”
Learn More About MiFID II:
Additional Research:
Greenwich Associates: MiFID II – Cost of Research
K&L Gates: Implementation For U.S. Managers
Accenture: MiFID II And What It Means For U.S. Managers