(Bloomberg Gadfly) -- For an investor, what's more valuable: an analyst report or a one-to-one meeting with a company CEO? New rules from European regulators are poised to expose the relative value of the two -- and it may not be pretty for the number-crunchers.
Investment banks have long brokered discreet meetings between investors and company bosses ostensibly free of charge. This so-called corporate access is a low-cost way of showing how a firm is plugged into the markets -- handy when angling for lucrative corporate mandates like share sales or takeover advice. It also gives investment clients an incentive to trade through the bank. MiFID II threatens to upend all this by requiring investors to pay for the service.
Smaller fund managers simply can't afford to pay much, leaving them at risk of being less well informed. But larger investment firms with more resources should be willing to pay a lot, and have good reasons to be seen to pay something reasonable.
MiFID II permits the cost of corporate access to be passed to the end customer if the charge is made transparent. In reality, most fund managers won't dare bill their clients simply for something that's meant to be part of their job. So they'll have to meet the cost out of their own pockets.
Regulators are circling. Since 2014, the U.K. Financial Conduct Authority has banned fund firms from passing on the charges associated with corporate access by including them in dealing commissions, but it hasn't enforced this effectively. MiFID II gives it new impetus.
The question is what price investors should pay. MiFID's rules say banks should charge a "commercial" price, while allowing for situations where investors can enjoy some free access. The onus is on the investor to determine the value of what it receives.
The price discovery process is starting at near zero. Investors claim they won't pay much. Banks can help them by producing ultra-cheap price lists that reflect the auditable costs of an event -- say, the total cost of room hire, food and security at a conference divided by the number of attendees.
That clearly doesn't capture the full value to the investor. Some portfolio managers won't make a final investment decision without meeting the CEO. Laying on bespoke trips to see a selection of executives in a particular industry is clearly worth more than the plane tickets. Regulators know that, so fund managers won't want to provoke them by paying peanuts.
With budgets finite, investors could well sacrifice spending on research for corporate access -- another blow to research boutiques and small brokers. For the big investment banks, it ought to be possible to turn a profit from the service. After all, both corporates and money managers like it and so should be prepared to pay up. Whether any earnings can match the value of the corporate finance and trading business that corporate access used to stimulate, we're about to find out.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.
To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net.
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