11 January 2017

Blog: The Capital Access Group Investor Survey

by Scott Fulton | 11 January 2017

We are now less than 12 months away from the imposition of MiFID II on the 1st January 2018. There can be few regulatory changes which have generated as much debate whilst providing so few conclusions. Given its wide ranging mandate, it is no surprise that the exact implications of MiFID II remain unclear. However, the specific requirement to unbundle the payment for services provided by brokers to investment managers should be simple to assess.

Pre-MiFID II, investment managers pay stockbrokers and investment banks for services ranging from access to companies (“Corporate Access”), investment research and execution of trade. Currently, these payments are made through a bundled commission fee charged on dealing in equities. Part of this fee covers the costs of executing the trade and the rest pays for other services, like access and research, either directly to the executing broker or through Commission Sharing Arrangements (CSAs). Under the new regulations, fund managers will have to arrange to pay for access and research separately and, where these payments are from fund investors’ fees, to justify the levels on a regular basis.

In 2014, the Financial Conduct Authority (FCA) estimated that UK investment managers pay an estimated £3bn of dealing commissions per year to brokers, with around £1.5bn of this spent on research. (FCA DP14/3). In a 2015 report, Payment for Research: The Calm Before the Storm, Greenwich Associates reported that institutional investors paid brokers €3.4 billion in commissions on trades of European equities during the 12 months ended Q2 2015. Roughly 52% of that amount — or €1.7 billion — was directed to pay brokers and third-party research providers as compensation for research. In the USA, Greenwich Associates estimates that 61% of the $9.7bn paid in equity commissions in the 12 months to February 2016 was to compensate for research and other services.

By forcing fund managers to consider the value of these services on a separate basis, the question of whether separate payment should be made at all is now topical. Payment for research aside, the need for a consensus on the value of bringing investors and companies together is now pressing. Under MiFID II, there is a strong possibility that fund managers will no longer pay for meetings with companies in whom they own shares or where they have an existing relationship. If access to these funds is to be maintained, this may prompt a significant change within company investor relations budgets.

Capital Access Group’s (CAG) approach to Corporate Access has always been to charge our PLC clients for our work in providing contact programmes amongst Private Client Fund Managers (PCFMs), Smaller Institutions, Family Offices and Pension Funds. This audience has been often overlooked by the stockbroking community because its equity trades do not generate sufficient commission to cover the costs of servicing them. In the future, payment for ancillary market services will cease to be a function of trading behaviour. Rather, the provision of company meetings will be determined by the preparedness to pay by either the companies or the investment managers. CAG believes that fund managers will expect companies to pay because they will find it hard to justify using clients’ money for this purpose.

In order to test this view, CAG has launched a survey of investor opinion. In the first of a quarterly series of polls, we have asked our investment audience whether they pay for corporate access currently and, critically, whether they expect to pay after MiFID II. We are conducting this survey in conjunction with The Times.

We believe that the results of this survey will provide our fund audience and our company clients with important intelligence.

The survey will close on 20th January 2017. It can be found here.