Market downturn sparks debate on investment research spend, regardless of MiFID II’s payment rule.

If a rising tide lifts all boats, a falling one leaves many firms entering troubled waters with their investors at the top of 2019.

The last year has been difficult for asset managers and the investment analyst community, as MiFID II begins to show its teeth. To this effect, the Financial Times recently reported that "some fund managers have been charged recently for receiving unsolicited voicemails from bank analysts."

Information flow from analysts to asset managers may have been impeded in 2018, but this is of no concern to investors who are now actively making calls to find out "where the money is going."

Needless to say, the end of a 10-year bull market certainly has something to do with this.

This sea change has led numerous asset managers across the full spectrum of AUM to aggressively begin adopting a more formal research evaluation process. Investors have begun to demand greater transparency of their asset manager's research spend, regardless of whether they are bound by MiFID II or not.

The silver lining is that transparency is in fact increasing for investors, and also for the asset managers paying for services rendered, whether paid by themselves or via client commissions. In addition, greater transparency into research spend is now allowing asset managers to ease prospective investors as well, who are starting to request this information at the outset.

Concerning the research service providers, it has been widely reported that the number of service providers being utilized per asset manager has been reduced, but there is light at the end of the tunnel. The cream is rising to the top and the best independents have been reporting increased earnings share. Additionally, there are many cases emerging concerning bulge bracket firms partnering with and distributing the research of valued independents.

It's not all good news post market downturn however.

Asset managers are expressing more concern that their favorite analysts may not get the support they need to stay in business. Introducing a more robust evaluation process to give targeted credit to all of their research service providers, without burdening their PMs, is becoming increasingly important.

A formal research evaluation process, once seen as "nice to have", is appearing to become more of a must have for all asset management firms.

An increasing number of firms have begun tracking specific interactions with research service providers, in order to help them quantify their team's research usage alongside their existing qualitative process. Some firms have even adopted internal rate cards, attributing a "rate" to each specific interaction type.

However, in the greatest number of cases, we have seen a desire from asset managers to have the ability to easily spotlight specific meetings, events, and calls that have provided especially high value to them. This has greatly improved the conversation between asset managers and their research service providers, ultimately leading to better service received.

While it may have taken the introduction of MiFID II and a volatile market to get us there, a more refined research evaluation process ultimately help both parties work together more successfully.

Posted 10 January 2019 by Eric Menzie, Director, Investment Research Evaluation, IHS Markit

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This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.