America’s Response to MiFID II’s Research Regulations


The following is a guest article by Mike Carrodus, founder of Substantive Research, a research curation and benchmarking service, which will be hosting a conference on the implications of MiFID II reforms for North America (see agenda here.)

On June 12th at the Metropolitan Club in New York we will bring the buyside, sellside, IRPs, regulators and vendors together for the second year to debate the future of investment research in North America. The FCA will open with a keynote address, followed by panels covering scenario analysis for the SEC No Action Relief, balancing costs vs needs for quality research, research valuation and budgeting, changes in providers’ business models and products, corporate access and operational best practice.

The conference will need to help us answer four questions:

  1. Is moving to a P&L research funding model inevitable in the US, or is unbundling and transparency the main focus in a future where no single funding model dominates?
  2. What will the regulatory situation be after the No Action Relief ends?
  3. Are the proposed methods for paying P&L within the current regulatory framework (cash accounts at brokers, MFS model, banks becoming IAs) workable for the majority of US asset managers?
  4. If the US market does move to funding from P&Ls, what does that mean for the research market within the US and globally?

For the final question we can look at Europe, where the majority of research budgets now come from asset managers’ own resources:

  • Once firms understand their research consumption and the relative value within their provider list, the focus moves quickly to price. This becomes a procurement situation, with stakeholders across the firm involved in a process to balance needs with costs. This is unsurprising because research can be the second or third highest internal cost item – it hits the balance sheet as a visible, centralised, large number.
  • Banks will fight to stay on provider lists even if that means they take a fraction of the money they were receiving previously. And that process accelerates as asset managers realise how much of a buyers’ market they are in. Our work on research valuations also shows that even if a provider stays on an asset manager’s list the market share swings within each budget cycle are more volatile than ever.

But here is where we enter uncharted territory. If a significant portion of the US market brings research costs in-house, then the accompanying deflation in the market may be the final straw for some global banks. The internal subsidy would have to increase dramatically, and at that point the economics could force some tough decisions.

IRPs would suffer in the short term – perhaps not as much as in Europe because they won’t have the inducement rules to hamper their marketing efforts. But they will still look expensive against low bank pricing unless asset managers are strongly committed to rewarding differentiated, niche providers. Can they benefit if some banks capitulate and finally give them room? Perhaps, but it will be a tough road to get there and not all will make it.

What do European PMs miss most? The salespeople they had strong relationships with. These people performed a key function but have been the first casualties. They curated and highlighted the most important work in a way that matched PMs’ processes and preferences. It’s too late to reverse the process and whilst technology solutions are emerging to mitigate this effect, changing habits and workflows is always difficult.

Are consultants and end investors worried about the possible effects of smaller research budgets on performance, given recent analysis from Evercore and Frost Consulting [ResearchWatch subscription required] that suggests that the US will benefit from a competitive advantage if it doesn’t follow the European path?  The FCA sounded bullish when it said recently that “the reduction in charges incurred by investors in equity portfolios managed in the UK was in the region of £180m in 2018. Assuming similar savings going forward, this equates to nearly £1bn over the next 5 years.” How attuned are US asset owners to this issue?  Will US managers want to discuss the potential competitive benefits of maintaining a CSA-funded model with their clients, or will we see a level playing field develop later this year?

By the end of the conference the aim is to have a clearer picture of how the funding and transparency debate evolves, how viable P&L funding is in practice in the US now, and what the likely regulatory situation will be post-2020.

We would welcome you to join us to become part of the debate. Email us at with “ticket” in the subject heading to request a ticket, or visit our Eventbrite page.




About Author

Mike Carrodus founded Substantive Research, a research curation, comparison and valuation service in early 2015 with two goals in mind: to match research providers and PMs using a bespoke, data-driven process, and to help asset management firms ensure that they were consuming the highest quality research at the cheapest price. Substantive has a bi-weekly readership of over 1,000 buy-side professionals who use their newsletter as a key identifier of the best thematic work. Prior to starting Substantive Research in April 2015, he was Global Head of Institutional Sales at Ned Davis Research, one of the leading independent investment strategy research providers.

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