Research Payments - The tide is turning
by Alistair Haig, University of Edinburgh Business School
Neil Woodford’s announcement that from April 1st his firm will pay for research rather than following the standard practice of deducting it from funds in the form of dealing commissions. This bold step, made by one of the UK’s most prominent fund managers, follows Legal and General’s announcement to increase fees on active funds earlier in the year.
In my recent paper with my University of Edinburgh Business School colleague Bill Rees, we find that fund managers are striving hard to make the most of the investment research they obtain from external parties. Rather than bundling research they are working hard to obtain a wider choice of research, better value for money, greater independence and exclusivity. This has lead to increasing demand for independent research.
Some firms, such as Woodford’s, are taking the bold step of ‘going hard’. By paying for research using their own money they incur direct costs. Additionally, they can reduce regulatory uncertainty. Rather than waiting for MiFID II, which the industry has expected to be revealed ‘in the coming quarter’ for more than 12 months, and then the individual responses from European member state regulators, using P&L reduces the cost and hassle created by regulator uncertainty.
Woodford’s approach suits niche fund managers who are highly self sufficient and will often know the sources of information they are likely to need. Larger asset management groups are likely to find it more difficult to ‘go hard’. In order to offer a competitive philosophy and process, most managers will need to use information intermediaries to succeed. RSRCHXchange is an example of a firm which can connect fund managers with the research the need whether they choose to use CSAs today, RPAs in the MiFID II regime, ‘hard’ payments to be charged against their own firm’s P&L or indeed a combination of the three. A combination may be compelling.
Woodford’s announcement will get attention.