Research fees should be slashed for small funds

MiFID II’s purpose is to create a transparent and fair market, but its research unbundling might do the opposite for small fund managers. The sky high fees charged by some banks create an unnecessary barrier to entry and could hurt the functioning of markets.

  • By Francesca Young
  • 31 Oct 2017
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Large banks such as JP Morgan, Citi. Goldman Sachs and Sberbank are charging funds tens of thousands of dollars per year in an attempt to turn their research divisions into profit centres.

Many large firms are refusing to scale the cost downwards for funds that have only one or two people that would make use of the research. 

But when you compare the cost of, for example, JP Morgan’s research, at $25,000 a year for one person to use, to the cost of an entire junior analyst the firm can use all the time, that makes it clear how difficult it will be for a small fund to pay several banks their asking prices. 

They may not end up with a choice. If the indices that funds use as their benchmarks become exclusively available as part of the research package, new sky high costs of research will become almost mandatory for even the smallest asset managers.

Some say that funds that are already set up and running successfully will likely somehow make it work — whether that requires eating the cost themselves or passing it onto their end investors who are already happy with their service. 

But asset managers told GlobalCapital last week that it could hamper investment decisions and will certainly hobble the creation of new small funds. 

An experienced investor said he was not concerned about there being less research available, as the lack of information flow creates opportunities for him. 

Less transparency, more mispriced assets, and more outsized returns for those in a position to exploit the dislocation. Fine for those that can make the most of these opportunities, but the opposite of how an efficient market should work, which was, ostensibly, the aim of MiFID II.

Investors suggested that banks quoting aggressive prices for research to simplify the process of rolling out their offering in time for the January 3, 2018, deadline for MiFID to go live. 

Being firm about their propositions allows no negotiation and no lengthy to-ing and froing over price. That’s understandable but the problem could be easily be solved by simply pricing the research per user with no minimum number of users.

Efficient markets require a free flow of information and the largest possible pool of investors. 

In specialist markets such as high yield and emerging markets debt, funds tend to be smaller, while coverage universes are wide and idiosyncratic risk is enormous, making access to research not just desirable but necessary. 

But charging small funds high prices will almost certainly reduce the number of funds operating overall in markets, restricting liquidity, hurting price discovery and limiting access to capital. 

Most funds start small, but they grow, and some come to dominate the markets where they’re active. Even Pimco, which now manages $1.61tr, only started with $12m in assets in 1971. Banks would do well to remember that.

  • By Francesca Young
  • 31 Oct 2017

All International Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Citi 397,752.90 1499 9.04%
2 JPMorgan 363,181.70 1645 8.26%
3 Bank of America Merrill Lynch 348,228.35 1238 7.92%
4 Goldman Sachs 258,020.28 869 5.87%
5 Barclays 255,130.46 1004 5.80%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 HSBC 41,871.90 183 6.88%
2 Deutsche Bank 36,549.85 129 6.00%
3 BNP Paribas 30,861.76 187 5.07%
4 Bank of America Merrill Lynch 30,788.61 98 5.06%
5 Barclays 30,558.69 87 5.02%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 JPMorgan 21,646.51 97 8.85%
2 Morgan Stanley 17,632.84 92 7.21%
3 Citi 16,974.50 104 6.94%
4 UBS 16,761.62 67 6.85%
5 Goldman Sachs 16,323.87 89 6.67%