Will advisers be able to afford research after Mifid II?

(Money Marketing) -- Advisers are rethinking their approach to fund research as analysts begin to set their prices ahead of looming Mifid II regulations.

Competition is heating up among brokers on how much they can charge investment managers and advisers for their services as new European rules split fees for research and trading costs.

The change has led most research providers into a “desperate” race to remain on advisers’ buy lists by cutting costs to remain competitive.

With Mifid II’s start date only eight weeks away, small advice firms have expressed concerns over the impact these costs will have on their businesses. Some say they might reconsider holding some investments altogether.

Money Marketing has also spoken to some key research providers to see how they are trying to retain clients, which they will need to give up and what the future of research will look like in the years to come.

Client retention

Firms like Numis Securities, one of the biggest brokers in the UK, are going through research price negotiations with existing clients who have so far benefited from free services.

Brokers are selling investment companies and equities research either separately or jointly as a package depending on clients’ needs.

Numis head of investment companies research Charles Cade says for very small clients the firm will charge “a lot less” than large asset managers because of the minimal day-to-day contact with them.

For these clients, Numis has set a base charging cost of between £1,000 and £5,000 plus VAT. It is understood firms, including Albion Strategic Consulting, Jefferies and JP Morgan Cazenove, could also charge up to £10,000 for some small clients though.

Cade says: “Most of the clients are keen to sign up. We are fairly well positioned because as a house Numis is highly rated for investment trust research.

“We had discussions with our clients for a while, we have a charging structure that largely reflects their usage and size. We try to reflect what they do and their requirements, so for a very small adviser we will charge less.”

Numis says it has set a deadline to finalise pricing deals just before the Mifid II start date, but it couldn’t yet assess what changes the regulation will bring to the business’ profitability. However, for now, it says it is planning to add one person to each of the service and research teams to cope with larger customers.

Cade says: “What we do know is that some clients will feel they are not paying what they should because of the competition in the market.

“There are some brokers that will find their distribution severely impacted because they won’t have access to some of the major private wealth groups.”

Rival broker Winterflood confirmed it will offer clients a flat fee of £3,000 per firm, regardless of their size. The deadline for clients to decide if they want to buy their research is set for mid-November.

Winterflood head of research Simon Elliott says he is “delighted” with the number of existing clients that have decided to buy the research. Elliott says: “We are keen for people to continue to look at investment trusts. We are trying to keep the research as simple as possible with the lowest costs, and we are not trying to monetise this.”

But the firm is aware not all its 400 clients will decide to accept the new deal, especially IFA businesses and chartered financial planners.

Elliott says: “Clearly not all 400 will be minded or maybe not wish to continue receiving investment company research but hopefully we continue to service as many as possible. Frankly, £3,000 is quite a lot of money for [small advisers] but at the moment that is our pricing structure and it will be for 2018 but it just means the smaller guys will have a more difficult choice to make.”

He claims small groups could still access “some research” in the market or get additional information from fund groups.

‘Prohibitive’ costs for advisers

Like many of his peers, Meldon & Co managing director Mark Meldon uses material from Winterflood or Numis, which covers a wide range of investment trusts and macroeconomic data.

Meldon regularly recommends investment trust shares to his clients, particularly those with Sipps, and currently holds £20m of clients’assets within these funds. But he says Winterflood’s price tag is “prohibitive” for the company as it would be equivalent to 6 per cent of the firm’s turnover, which is £200,000 a year.

Meldon says: “I don’t mind paying for this as I don’t want to charge my clients, but they offer no options to pay on monthly or quarterly basis. There must be a way around this from a practical point of view.”

The Association of Investment Companies has been lobbying brokers to offer the opportunity to pay monthly or quarterly.

AIC communications director Annabel Brodie-Smith says: “I spoke to brokers and they seem quite positive about charging on a monthly basis. It’s going to take a while for this to bed down. We are absolutely aiming to ensure there is research for investment companies in the market. Now it may be that people or boards will be paying for research more to get more distribution of it because if it is paid-for research it can be distributed anywhere so that might be a consequence of this.”

Elliott says he might accommodate the payment instalments but needs to see whether this system can work practically.

Capital Asset Management chief executive Alan Smith says the firm has always bought third-party independent research and never passed that cost to clients.

Currently it buys research and analysis from Albion Strategic Consulting and although the terms are confidential Smith confirms the figure would be around £10,000 a year.

Smith says: “Frankly if an advice firm can’t afford £3,000 for research I question their ability to provide investment advice to retail customers.”

‘Analysts on the streets’

Not all brokers have agreed to compete on pricing for their research.

Peel Hunt researches around 300 companies in various sectors.

When the new MifidII rules came out in 2014 the firm set a price low enough to be “inoffensive” to any firm, from private wealth companies to start-up asset managers, says chief executive Stephen Fine. However, the current strategy is to not undergo further pricing cuts.

Fine says: “Over two years ago there was a massive degree of arrogance from the sell side about just how valuable their research was but we thought they were never going to get paid that amount of money and sure enough what we’ve seen starting in September and accelerating quite aggressively is the race to zero. But we are not going to play the race to zero game. We’ll charge more than JP Morgan.”

The decision of Peel Hunt stems from the fact that the quality of research could be naturally compromised because of firms “undercutting each other”, says Fine.

“What we see is an almost desperation to remain on the buy side broker lists. I see cases where the level of pricing will probably contravene the inducement rules but they are difficult to police and monitor. You are getting down to a level that cannot be even remotely close to a profitable business for any of the providers.

“If they continue along this route, by the third quarter of next year people will be earning no money and they’ll be out of work, so you’ll see analysts on the street.

None of the existing clients at Peel Hunt has said no to the firm’s research deals, but one group remains undecided.

Waverton Investment Management, a private wealth firm managing £5.3bn assets, has allocated a certain amount of money in its research budget, but does most of its research in-house.

Waverton fund manager James Mee says resources to buy investment trust and bond research make up 10 per cent of the budget. He says: “Brokers have cut fees by 25 per cent overnight, although not all of them. If you had a new idea, it might be highlighted by the screening on investment trusts, for example, then we’ll meet the management, go through the portfolio line by line to understand how the fund performs, when you are expecting it to outperform or not to perform and what buy-sell level it will be and we do that internally.

“Once you start outsourcing those sorts of decisions you run the risk of missing out on things.”

Meldon notes that over the last 20 years most of the intermediated business that has gone towards investment companies has come from small IFAs. He argues ETFs and open-ended funds might not require as much research as investment trusts, where attributes such as premium, discounts and gearing can change frequently.

Meldon says: “I get meeting notes from Winterflood which are very interesting and that doesn’t lead me to recommend a fund but I’ve got my favourites as we all have like Scottish Mortgage [from Baillie Gifford]. I am quite happy to continue recommend that but if there is something going on that I am not aware of I can’t do everything for everybody so I do rely on some external research.”









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