(Bloomberg) -- As fund managers and research providers tussle over the cost of research under new European rules, some wealth managers are resisting the idea of paying anything at all.
The MiFID II regulations are “just another way of taxing people,” said Hilmi Unver, who heads the ultra-high-net-worth and family office unit at Geneva-based wealth manager Notz Stucki & Cie. If an asset manager tries to pass on research costs “we'd drop the fund. There's no reason to pay more.”
The European Union's revised Markets in Financial Instruments Directive regulations require money managers to pay for research separately from broking services from January. This means that for the first time asset gatherers will have to decide who pays for the research that helps them make their own investment decisions: the fund manager or the end investor.
“They know it wouldn't be appropriate” for asset managers to pass the costs on, David Bellamy, chief executive officer at wealth manager St. James's Place Plc, said in a July interview. It will become a “cost of doing business rather than charging it on to us or to clients in any way, shape or form.”
Investment managers must either pay for analysis out of their own profit-and-loss accounts, meaning they absorb the cost themselves, or through research payment accounts which are passed on to the client. St James's, which oversees 83 billion pounds ($106 billion), expects most of the funds to which it delegates management to absorb the cost of research.
“What happens to the fund manager that is negotiating with the banks this fall on the basis they are going to use client money, but then find out in February they can't because of all the asset owners have said no?” says Neil Scarth, a principal at Frost Consulting in London, whose clients include sovereign wealth funds. "If the asset owner says no to the research budget, it means the asset manager will have to pay for their research budget whether they want it or not."
Research prices will vary widely depending on the service required. Bank of America Corp. plans to charge asset managers as much as $80,000 a user per year for its research division's full package of services, according to a pricing document seen by Bloomberg News. UBS Group AG proposes to charge about $40,000 a year for around five users to have basic access to its reports, people familiar with the matter have said.
Some asset managers have already decided to absorb the costs. U.K. asset managers Baillie Gifford & Co., Woodford Investment Management Ltd., M&G Investments and Jupiter Fund Management Plc, which between them manage more than $540 billion, said they plan to pay for research out of their own profits. On Monday, T. Rowe Price Group, the U.S. manager that oversees $927 billion in assets globally, said it will pay for third-party investment research used by its U.K.-based investment managers.
Still, some fund managers are expected to continue to pass costs on to their investors. Investors ultimately pay all the expenses of the fund whether they are part of a management fee or declared separately, said Guy Foster, head of research at Brewin Dolphin Holdings Plc, a wealth management firm overseeing 39.2 billion pounds in assets.
“It is appropriate in many cases for funds to pass on their research costs if the company has a variety of different products,” he said. “It's going to be paid for by the clients one way or another.”
Since the long-term trend in fees is downwards, it would be difficult for managers to recover those research costs through higher annual management fees, said Dean Frankle, a principal at the Boston Consulting Group.
Geneva-based investment adviser Fundana SA, which oversees $1.1 billion, will pull assets from its underlying hedge fund managers if they attempt to pass on any additional or higher fees, according to Dariush Aryeh, chief investment officer of the firm's fund of funds.
“Not only are we not going to pay additional fees but we are making sure they come down,” Aryeh said. “The whole industry has to rethink its fee structure as returns are not stellar anymore.”
To contact the reporters on this story: Julie Edde in London at jedde2@bloomberg.net, Suzy Waite in London at swaite8@bloomberg.net.
To contact the editors responsible for this story: Neil Callanan at ncallanan@bloomberg.net, Paul Armstrong
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