Could MiFID II Regulations Spark Contraction in Research Industry?

New regulations necessitating the disclosure of research costs could lead to a reduction of analysts and personnel.

The upcoming push towards MiFID II this January will dramatically reshape the financial services industry. However, the shift towards new sweeping regulations will not be without costs, namely in terms of research capabilities –firms to date have been able to undergo this spending without full investor disclosure. In light of the new regulations, Union Asset Management, one of the largest asset managers in the country, will be parting ways with 100 of its research personnel.

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Union Asset Management is just one of many investment groups that may be scaling back its research capabilities heading into 2018. New rules will ultimately yield wide ranging influences on how groups allocate research spending, which could winnow the field of analysts at banks and brokerages – while this doesn’t necessarily portend a flurry of layoffs, this shift could drive a consolidation, including a premium for top-tier analysts and personnel.

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Full Disclosure

Under the new MiFID II laws in January 2018, asset managers and investment fund companies will be obligated to disclose to investors precisely how much they plan to pay for research. Germany’s third-largest asset management company opting to lay off a hundred of its external analysts could develop into a broader trend.

It is likely that there will be a push towards cost reduction amongst many European asset managers in 2018 – this could also result in internalized research plans rather than enlisting external analysts. Union Asset Management currently employs over 200 external research providers, with the cuts representing a full 50 percent reduction of this pool.

Relative to the broader industry, analyst and research roles have been much more resilient than other banking, IT, and back-office jobs over the past few years. This may be changing, as research houses could be next in line to contract. Presently, asset managers benefit from the free analyst research that they receive, given that this service is integrated into trading costs. This was a point of emphasis amongst regulators, which have expressed caution that investor funds were not being optimally spent, necessitating the new law.

Another consequence of the passage of new laws could be a reduction in trading costs, which have been entwined in research spending at several asset management groups. With nearly six months to go until MiFID II comes into force, the research industry has been put on notice.

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