MiFID II helping to drop costs and support returns

It’s been more than a year since the second Markets in Financial Instruments Directive, known as MiFID II, was implemented. This European regulation has a global impact on financial services and is aimed at improving investor protection and increasing transparency. In many cases, clients of early adopters are enjoying lower fees, which is helping to support investment returns.

MiFID II captures clients, investment teams and securities within Europe. So even if an investment professional sits in Australia, MiFID II may impact the business, depending on where the security trades, or where the client or investment team sits.

The rules affect costs paid to counterparties for trading and external research services. In the past, these fees have been packaged as a combined service, with commission paid to brokers in return for executing trades and providing research.

Prior to MiFID II, commissions for bundled services were almost always paid for from the fund, which meant clients paid. Post-MiFID II, dealing commissions are still paid for from the fund as before, but research, which previously tended to be provided by brokers alongside the other services, must now be paid for separately, either by the fund or by the asset manager out of their own profit and loss (known as a P&L payment), so costs are “unbundled”.

MiFiD II benefits

Reduced investment fees are one of the main benefits of MiFID II, with costs falling as asset managers are able to choose the best dealing service separate to the best research service.

Large asset managers have typically brought research costs onto their own P&L, with smaller asset managers or those with very high research costs such as hedge funds sometimes opting to continuing to pass these costs on to clients. AMP Capital pays for the share of all research costs captured by MiFID II from its P&L.

Post-unbundling, AMP Capital can now more easily commission research services from the best provider, without needing to link this service to a dealing provider. This targeting of research has led to better quality research for the same or less money, and research payments are around a third lower than pre-MiFID II.

Costs paid for dealing and external research are typically measured in single digit basis point over funds under management. This may make these numbers sound small, but when applied over large funds, they can amount to very large sums.

The average commission rate paid for dealing has fallen, which has, in turn, lifted net returns for clients.

At AMP Capital, client costs for research and trading have been reduced by around A$10 million post-MiFID II, while investment performance has in aggregate remained strong - a great outcome for clients.

For dealing, we now have more freedom to use best-in-class trade execution services, without needing to consider who provides suitable research services. There has also been a trend toward independent research providers and expert networks, bringing in differentiated insights for our investment teams.

Looking ahead

Ultimately, performance after costs is what matters. Clients should be asking investment managers to break out the total cost of research and of dealing over the last few years. If MiFID II has been adopted, it is likely these costs have fallen.

The impact of MiFID II has been substantial in Europe and the benefits have been material for clients of firms that have fully embraced MiFID II, especially those who have applied a global lens. But implementation is complex. Should MiFID II become a global standard, the benefits experienced by clients of early adopters will be magnified. We believe that at AMP Capital MiFID II is proving to be successful in delivering better client outcomes.