MiFID II, the EU’s continued response to the 2008 financial crisis, came into force just over a year ago and took on a number of regulatory avenues in the financial markets. The regulation, introduced January 2018, is meant to create further transparency for investors and customers. One particular area of focus is the impact on research costs.
Prior to MiFID II, an investment firm would be able to charge investors for research costs by lumping it under their commission or brokerage fees.[i] With MiFID II, “research costs” are to be recognized separately from this previous form. From now on, research costs are either recognized as an isolated revenue stream, or absorbed by the investment firm as an additional cost. [ii]
Although this affects Europe specifically, the intersectionality of global markets means that the new regulation for research costs will have an impact abroad as well. Plainly, non-EU firms that distribute research to European clients will be held accountable to regulation outlined by MiFID II as well.
The influence of these guidelines are yet to be fully understood, the response that investment firms will employ when faced with the regulation; is wedged between deciding whether or not to charge customers for research. Sustaining this activity could enable a new set of opportunities for firms to specialize in research, and potentially create an industry predicated on the different faucets of research opportunities.[iii]
Conversely, while this shift may represent growth for some, another potential outcome lies in the possibility of substantial cuts to research teams. Investment banks have already begun to cut back on research department resourcing to cut excess costs.[iv] The CFA institute- a global association of investment professionals- conducted a survey of its European members and found that 53% expect the firm to pay for research.[v]
Since research costs are to be accounted for separately, it also sheds light on a growing need for the definition between what constitutes research costs, and what would be considered “other expenses”.[vi] Items that might be labelled “ideas and commentary” and not constitute as a true “recommendation for action” could fall under the spectrum of marketing costs, instead of revenue-generating research costs.[vii] This change in the cost allocation impacts the number of analysts needed in teams, and resultantly teams will be looking to slim down to retain only a certain number of staff. The research job pool has already seen sizeable cuts with the number of analysts at the 12 biggest banks/investment banks having fallen by over 600 in the last 4 years.[viii] The CFA Institute recently noted “any changes in where research is sourced from may have implications for where analysts are employed, as well as for the aggregate number of analysts employed.”[ix]
Millennials can expect some impact; analyst roles in financial institutions are largely filled by entry-level positions, typically comprised of fresh graduates looking to establish their careers. This is not to say that Millennials will necessarily see major job cuts, but it is worth pondering whom, if not those who are just getting their foot in the door, will be most affected by this new regulation.
[i] Bloomberg (September 19, 2016) MFID II set to disrupt investment research worldwide
[ii] Ibid Bloomberg
[iii] Quinlan & Associates (August 2016) Research in an unbundled world
[iv] Financial Times (February 7th 2017) Final call for the research analyst?
[v] CFA Institute (2017) MIFID II: A new paradigm for investment research
[vi] PricewaterhouseCoopers (September 2016) The future of research
[vii] Ibid PricewaterhouseCoopers
[viii] Ibid Financial Times
[ix] Ibid CFA Institute