David Allen, Global Chief Investment Officer
Increased regulation is a thorn in the side for many fund managers, but I believe it often changes our industry for the better, once we step back from the details and focus upon the intent.
It’s been about two months since the European Union demanded fund managers split out the cost of investment research from the trading commission they pay brokers, under new rules implemented as part of MiFID II, or The Markets in Financial Instruments Directive.
The regulations, part of the biggest ever changes to sweep European markets, have required everyone who provides services in Europe linked to all asset classes – be it shares, bonds, derivatives – to stop and think about what they specifically want and need.
There has been vocal opposition from within our industry as they have wrestled to implement some of the most far reaching regulatory change of recent decades - especially Europe-based fund managers and brokers.
At AMP Capital we have chosen to take a different view, as we see the new regulation as a catalyst for us to do better for our clients. Our research costs are now materially lower – in fact around 40 per cent below where they were before the regulations changed in January 2018.
We have fully embraced the advantages of separating payment for research from dealing and have unbundled our commission costs globally, not just in Europe (as required under MiFID II).
This is about being on the front foot.
I believe regulators in many major markets will roll out similar regulations to MiFID within the next three to five years. Unbundling research costs will become mandatory in these markets, most likely including our home country of Australia.
Our A$3 trillion Australian superannuation industry could use this as a way of positively promoting itself.
Confidence in our industry has taken a hit globally in recent years – the focus upon costs as the primary evaluation tool for asset managers (instead of performance after costs) is evidence of this. I believe this move toward lower costs and greater transparency will help us as an industry on the road to regain the trust of clients and refocus discussions over time on delivering great after cost outcomes for our clients.
After all, it was the Global Financial Crisis, that led to regulations such as MiFID in the first place – reducing the possibility of a repeat is hard to argue against.
Those firms whose fee structures are impenetrable might not like it, but we have used MiFID II as a time to take stock and move towards a clearer breakdown of services and costs.
Large areas of the fund management industry in Europe have been resistant to the new regulations, and in Australia many players have not considered the likelihood of similar regulations being introduced.
That’s even as Australian Securities & Investments Commission has indicated that it supports what MiFID II is trying to achieve – being greater transparency of costs.
Even if regulators decide not to roll out a MiFID-style framework, I think many aspects will become global best practice.
Everyone managing retirement funds should be thinking about how to maximise after cost outcomes to the client.
The 10 major investment banks are likely to cut spending on research by about US$1.2 billion per year as a result of MiFID II, due to investment firms being pickier about what research they actually want, according to McKinsey & Co.
That’s a massive saving for clients, who would have eventually worn these costs. Imagine the savings that could be made if this style of regulation spreads beyond Europe?
For us, the benefits of breaking out research costs have been immediately clear.
We used to have close to 100 counterparties, including stockbrokers, expert networks and other research providers. These new regulations have reduced our number of providers to around 60 and hastened our move away from conventional brokers to expert networks.
On average, industry statistics show that pre-MiFID II, global long-only asset managers paid about 2 to 6 basis points per annum for external research. We expect that range to be lower going forward.
Not only are our research costs lower, but we also expect to reduce our dealing costs. Previously our dealing team had to ensure sufficient trades were directed towards research counter parties to pay them for their research. Now our dealers can focus entirely upon obtaining the best trade outcome for clients, without distraction.
I compare it to going to the supermarket. If you had to buy your apples and oranges together, you might not be getting the best of either. Usually it’s better to buy them separately. This is what we have found for research and trading.
Separating research and dealing has allowed us to get a better deal for both.
Sure MiFID II has had its problems. No regulation is perfect, but the intent is clear. By embracing the intent, we can deliver better outcomes for our clients - helping them with their investment and retirement dreams - and help our industry on the road to rebuilding client trust.
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