MiFID II Pricing discussions: back to basics for providers of equity research

“It’s not only about the survival of equity research providers, it’s actually about how the entire research industry is going to be configured in the future.” – James Patrick, Templar


Establishing pricing in a market that hasn’t priced before, competition and tapering buy-side budgets – all these factors weigh heavily as the deadline approaches for the implementation of the overhauled Markets in Financial Instruments Directive (MiFID II).

Post the financial crisis of 2008, a spotlight has been shone on the original MiFID that’s been in place across the European Union and, while the majority agree that it’s been a long time coming, the updated directive will bring unprecedented change to the markets when it goes into effect January 3, 2018.

Adding to its tumultuous roll-out, in a recent statement by the Financial Conduct Authority (FCA), the regulator visited 17 of the 31 investment management companies currently being analysed for a review of dealing commission expenditure, and came out strongly saying companies were “falling short of our expectations”.

Our team of advisors in London, who have extensive experience working with both asset managers and research houses, unpick the intricate nature of the current problem and offer a ‘back to basics’ approach as a possible way forward.

Templar’s James Patrick, who leads on the advice for this specific aspect of MiFD II says:

“Research departments in investment banks and independent research providers have to work out what they’re going to charge asset managers for access to their research. And the asset managers have to figure out how they’re going to pay for it, without passing too much of the cost onto their clients.

So you’ve got two ends of a situation where both  are feeling their way and this makes the discussion tricky. The big asset managers will currently have something between 250 and 350 brokers and almost certainly that number will have to reduce, possibly by 50%. That means if you’re a broker or independent research house, you’re fighting for position, and possibly for survival.

There’s a lot at stake here – so the way research houses and research departments handle this is fundamentally important and not just for themselves but for the entire industry. The effectiveness of their negotiations will make all the difference.”

While there are numerous strategies and techniques being tested across the board, Templar offers timely guidance to heads of research and sales departments on how they should position themselves and their fees.

“We’ve had discussions with well-known research providers and as a result we can identify some key threats and opportunities when discussing pricing and fees with counter-parties. At the end of the day not everyone can come out happy.

What will help many research providers and in some cases enable them to side-step possible consolidation, is being able to negotiate their pricing and fees much more effectively than they are doing at the moment. This includes, developing your value proposition and being able to articulate it to a paying audience and this needs a specific skill set.”

Jupiter, one the largest asset management companies, recently announced that they’re making a provision for £5-million worth of research next year and that the move will give them a “competitive advantage”. In a Financial Times article, Jupiter’s chief executive said: “Now I can look my clients in the eye when they ask me: ‘what else do you charge to our funds?’ The answer will be zero.”

“This sends a signal. All asset managers will need to make a decision: pay for it out of their budget and therefore reduce their profits, or pass the charge for research onto their clients. Most of them will be reluctant to pass the charge to their clients through their fees.

So many will make a provision for paying for research in their budgets. But this provision will probably not be enough to satisfy all of their research providers. If this happens across the industry, some providers are going to have a really tough time,” James added.

There are a lot of moving parts but here’s some high-level advice:
  • Engage with your clients; talk to the correct person, not the easiest person
  • Adopt an attitude of mutual problem solving
  • Look at the situation from their side
  • Be clear on your Value-Proposition
  • Do not allow yourself to be ‘salami-sliced’, any agreement should be a package
  • Anchor your discussions with suggestions
  • Do not allow untrained people to have these discussions
  • Practice, rehearse and get specific guidance and advice

Related page: Negotiation

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