Sometimes I look back fondly on the simpler good old days. Our equities managers did business with brokers, who rebated part of the commission they earned on stock transactions – sometimes with a Bloomberg terminal that could be made available to the pension fund, but also through sell-side analyst research.
But such ‘soft dollar’ commissions have long had their day in this era of fee and cost transparency, and MiFID II is finally making sell-side brokers charge separately for analyst research. Asset managers must decide whether to absorb the cost or pass it on to clients.
At Wasserdicht we have a research budget and there are a number of boutique houses with credible output but we don’t rate most sell-side output. My colleagues from around the world pretty much share the same view. We are looking carefully at the prices the market will place on sell-side research.
A meeting with Agnes, our account director at BIG Asset Management, was interesting. This summer, a number of asset managers have made their position clear on research costs but most have been waiting, probably to see which way their competitors move.
‘We have decided to absorb the cost of research,’ Agnes told us in late September. ‘There are pros and cons with each different approach but we feel we are doing best by our clients.’
Yet earlier in the year Agnes said she couldn’t see how managers could avoid invoicing clients separately for research costs, given today’s need for cost transparency. ‘How else will clients know the costs are being apportioned fairly,’ she told us. I reminded her of this. It made her look uncomfortable and she mentioned evolving internal practices.
‘We can assure you that we don’t intend to raise fixed fees to pay for these costs,’ she says. As far as we are concerned, the proof of that pudding will be in its eating.
Pieter Mullen is investment director at Wasserdicht Pension Funds