Upheaval in Research Regulation

Recently EU lawmakers rewrote their financial rule book MiFID II which will change how research will be sold.

Gone will be the days of offering market analysis for free, as part of a bundle of services offered to clients. Soon, brokers will have to decide how much to charge for research, and for the access to top executives that typically comes with it. Some firms are modeling packages on cable TV subscriptions, running from "basic" to “pay as you go” to “all-in” offers. As the cost of an analyst’s time and work becomes transparent, investors are expected to be more selective about what they pay for. The ranks of researchers already are shrinking.

This will mean that the way brokers charge their clients will start to change.

Nomura Holdings Inc. charging as much as 120,000 euros ($137,000) a year for access to favorite analysts in an all-inclusive "premium offering." That’s the same price as Credit Agricole SA’s most expensive package. Money managers have been quoted $50,000 for a basic package from JPMorgan Chase & Co.’s fixed-income analysts; Deutsche Bank AG and Commerzbank AG have pitched a metered, “pay as you go” approach for some investors. In the U.K., regulators said they will allow trial periods during which fund managers can receive research for free for up to three months.

Fund managers will end up having to pay for research more explicitly, the question is just how much, which will cause more scrutiny on the quality of research they will receive to determine what is worth the price tag. This will hopefully end up in higher quality research.

A widely held critique is that the investment industry suffers from a glut of research reports, many of questionable value. Now, analysts are rushing to prove their worth before the new rules take hold. Quality may improve as a result of increased competition from boutique and independent research firms. But there might be less coverage of small and mid-size corporations. Under the terms of MiFID II, managers that pass on costs to clients must regularly assess the quality of research they purchase.

In addition to higher quality research, a report by McKinsey found that banks could reduce spending by 30% on research, which could be a positive for Investment Banks:

In an industry so attuned to costs as investment banking, it’s a wonder that so many analysts are still engaged in the largely thankless task of generating a few thousand words a week for clients who pay them about as much attention as a fart in the wind. Of the 40,000 or so research reports cranked out each week by the 15 biggest banks, just 1 percent ever hit investors’ retinas.

I can’t see how so much research will be provided to clients that aren’t reading them once the payment system is changed dramatically. What are your thoughts on these changes? Do you think this will have a meaningful impact on ER in the States?