T Rowe Price has become the latest investment firm to announce it will absorb the costs of research when Europe’s new Mifid II regulation comes into effect at the start of next year.
The US-based firm, which manages more than $800 bn in assets, confirmed in a statement it would pay for third-party investment research used by its UK-based operations.
Under Mifid II, investors can no longer bundle research costs with commission payments and must either pay for research from their own costs or set up research payment accounts for clients.
Research services will also need to be clearly priced, leading to much speculation about what fee structures will be used by banks and other providers. Reports suggest some will charge more than $400,000 per year for the highest level of access to reports and analysts.
The move follows recent announcements from JPMorgan Asset Management and Vanguard that they will also absorb research costs internally. Vanguard, which mainly focuses on low-cost passive investment strategies, said it expected to spend only $5 mn a year on external research.
In its statement, T Rowe Price says it has worked to build out its own research capabilities. ‘In recent years, we have continued to invest in our alpha-generating capabilities around the globe by adding analysts focused on fundamental research, quantitative research, corporate governance, SRI and corporate access,’ says Rob Sharps, co-head of global equity and group chief investment officer.
‘With this decision, we have ensured our clients’ best interests are protected while preserving our globally collaborative investment process and our access to important third-party research.’
Mifid II is expected to lead to a squeeze on the research industry as fund managers closely scrutinize what they are willing to pay for. Many foresee a future with fewer analysts and reports, especially for the less lucrative small-cap end of the market.
With brokers less able to support companies through research and other services, IR teams may need to up their own marketing efforts. Another prediction is that companies will face a wide spread of analyst forecasts under Mifid II as research providers fight for attention.
Speaking on an IR Magazine Webinar earlier this year, Sarah Jane Mahmud, a regulatory analyst at Bloomberg Intelligence, predicted that research coverage ‘will undergo an upheaval over the next few years’. The incoming legislation will ‘trigger a contraction on the sell side and a more concentrated buy side,’ she noted.
