PLSA: Absorbed research costs must not impede transparency for investors

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By Flora McFarlane.

The majority of large asset managers are opting to absorb research costs rather than pass them onto clients, but investors must investigate those costs warns the Pensions Life and Savings Association (PLSA).

Under the regulations which come into effect on 3 January 2018, firms will be required to pay for investment research either from a fund manager’s own account, or through a client research-payment account. These charges are not permitted to be linked to transaction size or volume.

“Greater transparency about research costs should make it easier for pension schemes to see where their money is going and help them achieve better value for money,” says Caroline Escott, policy lead for investment and defined benefit at the PLSA. “Our advice to schemes is to check with their managers about what their policy on research costs will be in the wake of MiFID II.”

Caroline Escott, PLSAThe challenges around pricing fixed income, currency and commodity (FICC) research were acknowledged by the European Securities and Markets Authority (ESMA) in a July 2017 Q&A document in which the regulatory authority acknowledged, “The current lack of established market practices and mechanisms for investment firms to pay for FICC research separately from execution costs may limit certain operational arrangements firms can adopt to comply with Article 13. Primarily, FICC markets do not currently have explicit execution commissions and mechanisms that allow research charges to be deducted alongside transaction fees.”

It went on to note some types of research for material may also lack “substantive analysis” and instead represent information about financial instruments and short-term market commentary that meets the minor non-monetary exemption in Article 12(3)(a) and Recital 29 of the Delegated Directive, which would not require it to be charged for.

German fund manager Deka, and Canada Life Investments have been the latest to announce their investment cost arrangements. The Frankfurt-based manager said it plans to pass on the costs to clients, while Canada Life has chosen to follow the majority of firms in bearing the costs of all research payments currently charged to funds.

The world’s biggest asset manager, BlackRock, which has US$5.7 trillion assets under management (AUM), opted in mid-September to absorb investment research costs, and other rival firms are under pressure to declare their model as the deadline gets nearer.

Deutsche Asset Management (€711 billion AUM), and Barings (US$288 billion AUM) also announced earlier this month their decisions to pay for external research from their own accounts.

Amundi Asset Management (€1.276 trillion AUM) Man Group’s GLG (US$31.2 billion AUM) and Carmignac (€61 billion AUM) have said they will pass on investment costs.

With implementation of the new regulations just three months away, all those affected will be watching to see how the changes play out and with some funds having reversed their decisions regarding costs, the landscape is still to be clearly set out.

In September, just days after BlackRock’s announcement, Schroders, Invesco, Janus Henderson and Union Investment reversed their previous decision to charge clients, and reported they were planning to cover full research costs themselves.

Escott says, “Schemes should use this opportunity to think carefully about the value they get from investment research and continue to monitor costs closely.”

©TheDESK 2017

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