Brokers add up research bill before new EU rules

Brokers operating in the European Union have only a few months to comply with new rules requiring them to set a separate price for the investment research they have been bundling with the trading services they sell to fund managers. Talks about a pricing have dragged on, with fund managers taking time to figure how much they are willing to spend and brokers worried about losing revenues and big clients. The changes could lead to job cuts for research analysts and some fund managers may lose access to research if they are not prepared to pay up.

Many brokers use access to research as a way to draw in trading business.

The EU says these two services must now be priced separately so customers can decide if the bill for research is worth paying and to prevent conflicts of interest.

Regulators elsewhere are expected to adopt similar rules, adding to pressure on fund managers as they compete with lowercost funds that track a particular index.

“Historically, research has been a bit of a commodity; everybody has been producing it, oodles and oodles of it, in equities, fixed income, macro research, etc,” said Matthieu Duncan, CEO at Natixis Asset Management.

“That was all fine, but now we have to quantify this, the bar from asset managers is going to be a lot more selective, in one way, shape or form.”

Spending on research is inferred as a cut of total commissions paid by fund managers to brokers for all their services.

Consultancy Greenwich Associates says this is worth around $1.6 billion a year in Europe, around 44 per cent of overall commissions.

This figure could fall by $100 million over the next 12 months, according to a survey of asset managers by Greenwich.

“The greatest concern for research providers both large and small is that (the legislation) will prompt a substantial decrease in buy-side research spend,” said William Llamas, Associate Director at Greenwich.

“When asked about how firms’ overall research budget will be affected, close to 40 per cent of respondents predict a decrease.”

Just under three quarters of fund managers surveyed said they expected to cut the number of brokers they use.

Brokers are looking at several new pricing models to ensure they keep as much business as possible.