Will Clients Agree With UK Asset Managers’ Possible Move to Using Commissions to Pay for Research Once Again?


Since July 2023, the UK asset management industry has been discussing whether the research payment optionality proposed by Rachel Kent in her UK Investment Research Review is realistic, particularly since most asset managers would have to get approval from their clients to revert back to using commissions to pay for research after paying for it via P&L over the past few years. We suspect their might be some reason for optimism on this score.

Reasons for Optimism

Since the EU Council proposed MiFID II workarounds in April, the SEC allowed its SIFMA “No Action” letter to expire in early July, and the publication of the UK Investment Research Review on July 10th, global asset managers have been wondering what their next steps regarding paying for external investment research should be. 

In fact, we have had a number of conversations with asset managers over the past few months who have openly discussed whether it is realistic to consider whether they should switch from paying for investment research from their P&Ls, to potentially using client commissions in the future.  For the most part, these conversations were initially extremely negative as most asset managers felt their clients were unlikely to agree with such a move.  However, over the past six weeks or so, some asset managers have turned decidedly more bullish that some of their clients might be open to such a change.  This is consistent with some of the feedback presented in a recent guest article we published by Robert Nowicki.

So why the shift?  The rationale we have heard is that there is a growing view that a small number of large clients could move the needle on this topic, much as a few global asset managers were able to when the market decided to move from bundled commissions to P&L in the first place.  But why would pension funds take on the cost of research when asset managers are currently willing to pay for it themselves?  The answer is politics.

Ten large UK pension fund companies have recently agreed to support Britain’s Chancellor of the Exchequer Jeremy Hunt’s Mansion House Compact to voluntarily invest £50 bln from their direct contribution pension schemes into unlisted companies in an effort to raise both fund performance and boost economic growth in the UK.  This includes firms like Aon, Aviva, Legal & General, M&G, Scottish Widows, and five other large pension funds.

This move comes at a critical time for a struggling UK economy and financial services industry.  Could Jeremy Hunt leverage his influence with these same pension funds to encourage them to support UK asset managers’ move back to paying for investment research using commissions?  Possibly, particularly since the cost of investment research is a mere 1 basis point when measured against total UK AUM.  In addition, Hunt knows that sometime in 2024 the EU is likely to allow their asset management industry to use commissions to pay for research – a move that could attract even more UK managers to move to the continent.

Our Take

By all accounts, it looks like the MiFID II commission unbundling regime is likely to die a slow and painful death.  However, it is still too early to tell how long this death will take.  Ultimately, the length of this process will be determined by asset owners and their decision whether it is more important to them to see the lowest possible costs from the asset management industry, or do they want to see the highest returns from their fund managers?

The way it is currently playing out is most harmful for the small and mid-sized players.  Small and mid-sized UK and EU asset managers are finding it most difficult to fund their research needs from their own P&Ls.  Small and mid-sized UK and EU brokers and most IRPs are finding it extremely painful to withstand the 50% to 80% revenue declines brought on by MiFID II.  Small and mid-sized US brokers are also struggling with the loss of research payments from UK and EU asset manager clients since they are no longer allowed to accept cash payments for their research.  Unfortunately, most of these players have the least amount of influence and will therefore pay the highest price for industry delays and inaction.


About Author

Mike Mayhew is one of the leading experts on the investment research industry. In addition to founding Integrity Research, Mike is on the board of directors of Investorside Research Association, the non-profit trade association for the independent research industry, and a frequent speaker on research industry trends and developments. Mike has over thirty years of research industry experience. Email: Michael.Mayhew@integrity-research.com

Leave A Reply