Thursday, November 1, 2018 Stamford, CT USA — Brokers will be earning about 20% less on European equity research as of the end of 2019 as a result of MiFID II—a reduction of about $300 million. 

The largest European Institutional investors cut budgets for external European equity research by 19% in 2018, the first full year the new “unbundling” rules established under MiFID II were in effect. A new report from Greenwich Associates shows these investors are planning another 5%-6% reduction in 2019. 

“With the massive decrease in 2018, the worst is likely over,” says William Llamas, Greenwich Associates Institutional Relationship Manager and author of the new report, MiFID II at the Midpoint. “However, given the smaller research pool, investment banks and other providers will continue to fight for every last dollar, and success will be defined as ‘almost’ capturing the same revenue as in pre-MiFID II times.”

$300 Million Up for Grabs

Greenwich Associates research shows that intuitional investors are holding back about 30% of their total annual research budget for allocation over the course of the year.

Under MiFID II, institutional investment managers are required to show clients an overall research budget in anticipation of the coming year. From there, they can negotiate preliminary broker budgets with their counterparties, but not necessarily the full amount of their budget. 

Having about 70% of the total budget pre-allocated means that some $300 million in unallocated research budget is up for grabs intra-year—and it will likely be used to top off and award current providers for additional service throughout the year. “With so many hands in a smaller cookie jar, this unallocated budget will be incentive enough for global investment banks to provide exceptional service to their clients,” says William Llamas. 

Global Investment Banks Still Dominate Investment Research 

Leading up to 2018, the buy side had signaled its intent to cut European equity research spending under MiFID II by eliminating redundant research and services from the largest investment banks with product and services from other providers. However, at the midpoint of this year, more than 50% of European research/advisory allocation was still being directed toward global investment banks, with a much greater 60% from the largest asset managers.

Individual budgets allocated to global investment banks amount to nearly double those from midsize and regional investment banks. Although individual budgets are predictably wide-ranging, the global investment banks’ broad array of research coverage and services has warranted greater payment.  Written research and portal access agreements budgets, however, average around $25K for both classes of brokers.