Goldman Sachs Investment Unit to Pay for Research Under MiFID II
By Sarah Jones
dg> This is major market news about how wall street does business, a lot more employee downsizing coming. that isn't getting much coverage.
October 2, 2017, 12:16 PM EDT
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Goldman Sachs Asset Management has joined the list of firms planning to absorb the cost of third-party research after the new European Union MiFID II regulations come into force in January.
The Mifid II rules, which come into force in January will, among other things, require fund managers to pay investment banks and brokers directly for analyst research, instead of combining the cost with trading commission. In some cases, they will also have to justify this cost to investors. Essential stories related to this article Mifid What is Mifid II and how will it affect EU’s financial industry? FTfm Mifid II scrambles distribution of funds in Europe OTC markets ‘Overly zealous’ rules will drive away traders, CEOs warn “Mifid II is hurtling towards the industry and most institutions are unprepared,” said Ms Margetts, who left her analyst role at Investec Asset Management to set up Alpha Exchange. Ahead of the new rules, more than a dozen online research marketplaces, including Alpha Exchange, RSRCHXchange and Electronic Research Interchange, have sprung up. These gather research in one place for users to buy, with some saying they will take a commission. Typically started by former bankers and fund managers, they have zippy user interfaces and the promise of Netflix-style personalised suggestions. But these newcomers are aware they face a mighty challenge — in the shape of big data and research aggregators such as Bloomberg and Thomson Reuters, which provide dedicated terminals for asset managers and banks around the world and have decades-long relationships and deep pockets. “The aggregators are trying to capture share of the research distribution market at a time when disruption is happening,” said Gerard Walsh, head of business development at Northern Trust Capital Markets. “But they will need to be timely and nimble, and not all will necessarily thrive.” Of the 40,000 pieces of research by the 15 biggest banks that flood fund managers’ inboxes every week, only 5 per cent are opened, according to estimates by consultancy Quinlan & Associates, and less than 1 per cent are read. The new sites allow users to buy online but they can also track clicks and scroll depth to provide an audit trail of consumption that asset managers can use to justify their research charges. Many offer data analytics to find relevant research and make recommendations — and some rate and reward researchers. Pricing models range from subscriptions to pay-per-view and auctions. In the past 10 months, Alpha says it has signed up more than 150 research providers, from large tier banks to independents — as well as mid-size and larger asset managers. But some research providers warn the new services ignore the importance of existing relationships. “It’s not a transaction, like buying a book on Amazon.com; rather it’s a relationship,” said Paul Domjan, head of the research, analytics and data division at Exotix, a boutique investment bank in London. Here incumbents such as Bloomberg, Thomson Reuters, Factset and S&P Capital IQ plan to use their longstanding experience in aggregating research to continue distributing to their hundreds of asset manager customers. Bloomberg has introduced new functionality allowing asset managers to track interactions — such as face-to-face meetings — with analysts. This year, Thomson Reuters will enable fund managers to rank analysts’ work for the first time on its Eikon terminal. It is also working on an initiative to allow managers to buy “research collections” — for example a sector package. “We will see a number of innovations and business models in the year ahead,” said Mahesh Narayan, head of research and portfolio management at Thomson Reuters. “We are observing them, working out who we need to partner with and doing some innovation on our own side.” But the cost of using one of the big data companies can be a sore point among asset managers. Jeremy Davies, who in 2014 quit as a portfolio manager at CQS, one of London’s biggest hedge funds, to start RSRCHXchange, said he could compete with the cost of Bloomberg’s $22,000-a-year terminal. “For smaller fund managers on tight budgets we can provide access to research on a piecemeal basis — for example you may not want Italian banks research all year but you may really want it when there is a banking crisis,” he said. “For larger ones we can provide a way to access smaller, more niche research providers.” RSRCHXchange has signed up more than 220 research providers, he said. Some believe Mifid II will revolutionise how research is provided and consumed but others warn the time to make an impact is limited. “If you’re collecting research from third parties and providing them to Mifid investment firms with a filter and can charge on a granular basis, that sounds to me like a win-win for everybody,” said Neil Robson, a lawyer at Katten Muchin Rosenman in London. The newcomers “need to land with a big splash”, he said, “or they will just fall flat”.
GSAM, which oversees more than $1 trillion, intends to pay for the analysis used by its European investment management teams from January 2018, the unit said in a statement. The firm didn’t disclose the cost of the decision.
The revision of the Markets in Financial Instruments Directive, known as MiFID II, is forcing firms to separate the cost of research from trading-related expenses in an attempt to improve returns for asset owners. Most firms have so far said they plan to absorb the research costs in Europe rather than pass on the expense to clients.
Goldman Sachs joins BlackRock Inc. and the investment units of UBS Group AG, JPMorgan Chase & Co. and Deutsche Bank AG who have all said they too will pay for third-party analysis. Some money managers including MFS Investment Management say they will pay for research globally, regardless of whether a fund is affected by the regulation or not. |
