New changes to how asset managers pay for investment research could be disastrous for the boutique asset managers already being squeezed by cost pressures including declining fees.
When MiFID II, the revision to Europe’s Markets in Financial Instruments Directive regulation, is enacted in early 2018, the change could “imperil small managers and increase potential systemic risk in the marketplace,” FIS Group, a Philadelphia-based investment firm with $5 billion of assets under management, said in a white paper last month.
“MiFID II may be the final straw for firms struggling to survive,” Floyd Simpson, manager research analyst at FIS Group, said in a company statement about the paper.
In a paper on the potential impacts of the regulation, FIS Group suggested that MiFID II could accelerate the shift toward passive investing, citing a McKinsey & Co. study. Meanwhile, a shift in payment methods from “soft dollars” — bundling investment research costs into the price of trade executions — to “hard dollars” – charging transparent, set fees — could be costly for smaller firms, many of which lack the in-house resources necessary to ensure compliance with the rule change.
These smaller firms may not be able to weather additional expenses as well as their counterparts with larger balance sheets, FIS Group said.
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“While MiFID II creates much needed transparency in manager expense reporting, it could present yet another headwind to these boutique managers,” said Tina Byles Williams, FIS Group’s chief executive officer and chief investment officer, in the statement.
The asset manager suggested that the new regulation will speed up adoption of research technology like artificial intelligence, which could keep research costs down.
“This could create an industry shakeout, allowing managers with competitive performances and strong balance sheets the opportunity to stand out,” Simpson said.