Already this year, we’ve seen a ton of major changes. There is a potential trade war on the horizon, oil prices seem to be constantly rising, and Brexit has been messier than anyone could have ever guessed. But what has been the hugest change in the financial world has been the Markets in Financial Instruments Directive 2, which was introduced at the beginning of the year. While it was built to make the industry more transparent, it has brought with it more than expected.
From Bundled to Unbundled
One of the larger aspects of MiFID is the move for brokerage firms from bundled products to unbundled ones. In the past, a fund manager who was involved in buying a security using a broker would be required to pay a large commission. This covered not only the cost of putting buyers and sellers together but also the research from the brokerage fund regarding which securities were the best buys. Both the research and the transaction were covered under one cost as a bundle.
The research included also provided access to analysts with specialization in different industries and asset classes, meetings with executives, and tens of thousands of research papers. The problem was that this made it unclear exactly who the brokerage firms were representing and if they were offering the best possible deals for their own clients.
Changes Through the MiFID 2
With the new legislation, it is now required for brokerage firms to separate charges between research and operating transactions. It’s also important that they show clients how they act for the benefit of the client. No longer are bundled packages a possibility. This brought up a lot of questions regarding how valued the research is and how this will affect the financial industry on a global basis.
Before the new changes were implemented, many research firms and brokerages knew that a lot of uncertainty was coming. For research teams to be competitive, they would need to specialize and refine their research in order to be unique from other research firms.
Research shows that many United States investment managers are contemplating unbundling. This is partially due to the fact that any manager moving money for a European client has to comply with MiFID 2. It also involves the need for a higher level of transparency. With research firms being required to offer more attractive services, some analysts are worried about the security of their own careers. That makes sense as increased competition and decreased demand means only the best is going to stick around in the end.
The truth is that smaller firms may be able to distinguish themselves by offering high-quality research. In addition, the European financial industry has strengthened client confidence due to fairness and transparency. The new rules may result in a decline for the assess management industry, at least in the U.S. and Europe, but there is still potential for growth elsewhere.