Research conducted by the Electronic Research Interchange (ERIC), an open marketplace for the buying and selling of investment research, has revealed that more than 70% of asset managers will be re-examining their sources of research under the European Union's soon-to-be revamped Markets in Financial Instruments Directive.

The findings from ERIC's European Asset Management Survey suggest that financial institutions expect to have to overhaul the ways in which they conduct investment research but do not have a clear idea of the scale or extent of the changes.

ERIC says that 74% of these asset managers will scrutinise sources of research more thoroughly than ever before from January 2018 (when MiFID II comes into effect) onwards. By the same token, 74% of them forsee a reduction in investment bank research. 38% of asset managers are thinking of expanding their internal research teams. ERIC has also proclaimed that "one year out, 38% are not confident of being prepared for MiFID II unbundling; 42% are not entirely sure of their obligations."

The survey, administered during the fourth quarter of 2016, found that both the buy-side (those who buy investment services) and sell-side (those who sell them) anticipate the need to adapt to a world in which research fees are transparently reported and unbundled from trade execution fees. However, the questions of how their businesses will be affected, and how they will adapt, remain unanswered with just under a year to go until 3rd January 2018.

Support for MiFID II tempered with uncertainty over its results

Asset managers, according to the survey, broadly believe that the aims of MiFID II's unbundling rules are virtuous, with 74% of them believing that the buy-side should bear the cost of research. The question of whether the new rules will benefit the end investor (as anticipated by the regulator) or not is still open for debate: only 40% of managers expect that clients' new abilities to scrutinise research fees will benefit them.

The way ahead

There is a widespread feeling, according to the survey, that the industry will have to operate in a new way to ensure that the production of research remains viable. People are not sure that investment banks will be able to continue distributing the same volume of research a year from now.

The need for research will remain consistent, so with less provision from the sell-side, asset managers acknowledge the requirement for new sources and distribution models. One-quarter – 25% - of respondents believe that research spending will increase, while the remaining 75% predict that spending will either remain the same or decline.

An alternative solution

This raises the question: how will asset managers be able to access the variety and quality of research that they need if sell-side distribution were to decline, without spending more money? The answer, it seems, is a “third way”: 57% of respondents pointed to the rise of alternative research distribution platforms as the answer. It is through these that asset managers will be able to access specific and targeted pieces of research for clear fees.

Chris Turnbull, one of ERIC's founders, is of the view that MiFID II will change the investment industry forever but the consumption of superior research will remain a vital element of the investment process. He also believes that investment banks will continue to play a crucial part in the provision of research.

ERIC surveyed 91 respondents online, including analysts, wealth managers and custodians in the United Kingdom and Europe.