In early January of 2018, the changes outlined in MiFID II came into effect throughout Europe. There has been much speculation throughout the entire region regarding what the new legislative rules will have on the research industry. Essentially, the MiFID II framework brought forth fundamental changes to sell-side research services that has left many finance professionals questioning the future viability of the entire sector.
Before MiFID II, sell-side research was already undergoing downscaling across many major investment banks. In particular, European banks such as UBS and Barclays had been reported to be lowering headcount in research departments to half that of recent years. The introduction of MiFID II concurrent with this fundamental change in the research sector has led to many on both the sell-side and buy-side to speculate how research will continue to remain profitable in the coming years.
MiFID II research implications include that of a wide-scale downscaling and unbundling of all sell-side research. This has increased exponentially the amount of compliance costs and extra back office support needed to sustain research departments at many major banks. Before, many research services offered were bundled in ways that were financially favourable for sell-side researchers, allowing them to take advantage of large buy-side firms that were able to spend large sums of money on various reports. In light of this, most recent projections estimate up to a 30% decrease in research spending by many on the buy-side, especially investment managers.
Many look towards sentiment within the buy-side sector to gauge whether MiFID II research implications will cause fundamental and permanent changes to modern financial research services. Large asset managers such as BlackRock have expressed lukewarm feelings surrounding MiFID and are careful not to make any aggressive statements regarding the research sector. The new legislative changes have made it cheaper than ever before for large asset managers and funds to utilise research services. However, there has yet to be any indication of increased research spending within any of the large buy-side firms, resulting in more heated speculation about the future of research.
One figure that is often cited as a warning sign for research is the fact that since MiFID II, many sell-side research prices have not increased to reflect increased compliance costs. The fact that those working in research whether at multinational banks or boutiques are unwilling to carry forward the extra costs to their clients shows that many are eager to capture whatever little profit remains after the new legislation came into effect.
Voices within the research community have also expressed an exponential increase in the amount of talented sell-side research analysts making career changes to buy-side roles such as at hedge funds or asset managers. As revenues from research goes down and bonuses take a hit within many large banks, many talented researchers have begun seeking better opportunities.
MiFID II research effects include significantly lowered profitability within the sell-side research sector as well as large amounts of sell-side analysts leaving for funds and asset managers. All in all, consensus within the European financial sector is that there will be extensive disruption and unease within sell-side research for the foreseeable future.