(pictured: Seth Merrin)
Australian fund managers better get ready: MIFID II is likely to have an impact. Even if it doesn’t directly, managers’ super fund clients will be wanting to reap the benefits of the regulation’s requirements that separate the payment for research from the payment for investment transactions.
It has been a long time coming. It has been a cosy world for too long whereby brokers and (some lazy) fund managers passed on doubtful research. This is a world, now, where the asset owners are at last exercising their authority.
Finally, it seems, fund managers will not be able to automatically pass on the embedded hidden costs of broker research to their super fund clients that they have traditionally paid for as part of execution costs. And brokers, who are already struggling given the new world of low-cost transaction-based systems, will have to charge fund managers separately for their research.
The new regulation involves all fund managers which have European-based clients – which is a lot of Australian-domiciled managers – because they will need to enjoin MIFED II principals to all their portfolio management operations.
What’s currently happening in Europe, which will feel the brunt of MIFID II, due to take effect from next year, is interesting. Rumours are that, for instance, brokers are actually tearing up the cheques sent to them by fund managers for research payments. They are resisting the trend to separate research from transacting services to the last. You have to wonder why.
The embarrassing part of this big shift is that broker research is likely to be unveiled as, usually, sub-standard sales-oriented views, rather than genuine quality analysis.
According to Seth Merrin, the founder and chief executive of Liquidnet, the change will be quite disruptive for the sell side and will change the way investors are served by their brokers.
The big banks have traditionally spoken for about 60-70 per cent of all commissions, through their investment bank and broking subsidiaries, which has been “impenetrable” to specialist researchers, Merrin says. “Now, it’s open for business. We believe it’s a very big opportunity.”
Seth Merrin, a well-regarded philanthropist who also founded Liquidnet, said on a visit to Australia last week that even if Australian fund managers or super funds managed just “a little” money for European clients they would have to implement a MIFED II process across their portfolios.
“This will change the way Wall Street works. This will change the way services are consumed between the buy side and the sell side,” he said.
He said that a recent survey of fund managers show that as little as 1 per cent valued their broker research. “It’s a bit like getting the $7.99 buffet,” he said. “It’s mediocre. But it is ‘free’. What’s going to happen now is that we will move up to a la carte, so people will get research that they are actually willing to for.”
Merrin said:. “MiFID II will also apply to overseas institutional investors from Europe who invest in the Australian market. Said differently, this will affect Australian fund managers handling foreign money. Australian fund managers will need to adjust to this, and so far, there’s a feel that not a lot of people here are fully prepared for this massive transition.”
Liquidnet is reloading its financial innovation with the launch of the two next stages of its dark trading venue: targeted invitations and Liquidnet’s ‘Next Gen Algos’, allowing institutional traders to seek liquidity and build blocks according to their needs. Both services have been designed to continue to improve asset managers’ performance, by minimising the loss of Alpha.
The company said: “Going forward, Liquidnet will continue working to transform the role and influence of institutional traders into a measurable performance advantage for their firms. This is Liquidnet’s vision. The company is helping institutional traders to shift their focus from searching for liquidity to protecting and delivering alpha.”