Brokers in the Square Mile are facing a time of unprecedented change – and research may change, too, if the Panmure Liberum tie-up indicates the future
Nothing like a blockbuster merger to kick-start 2024. In a move that signals ongoing consolidation in the City, Panmure Gordon has merged with its longstanding rival Liberum. This alliance comes at an interesting time for an industry continuing to grapple with diminishing research fees, not to mention a general slowdown in activity within UK capital markets.
Traditionally, City brokers have been integral to the advisory process for UK Plcs, often providing their expertise for nominal fees. However, the implementation of MiFID II back in 2018 triggered a persistent squeeze in investment research budgets, leaving those brokers providing analyst reports, struggling to maintain their traditional role. This latest merger represents another step in the consolidation trend, which also saw Charles Schwab acquire TD Ameritrade back in 2019, further limiting the available research options for investors. The issue is that as brokers converge, they often consolidate research coverage for the same asset class.
The impact on fund managers is noteworthy, as the merging brokers might offer different research rates depending on the nature of their interactions. In a scenario where asset managers already receive significant research from two brokers involved in the same M&A deal, questions arise about the feasibility of reconciling varying fee structures. It is not inconceivable that certain fund managers may find themselves willing to pay fixed fees for corporate access from one research house, but hesitant about variable rates for insights into FTSE 250 stocks from another.
This latest merger could very well be the straw that breaks the research camel’s back when it comes to triggering brokers to more accurately capture and invoice against specific research interactions. While this may sound like a positive move, it actually introduces further complexities in the research billing process. Investment managers, already grappling with shrinking research broker choices, could be forced to scrutinize every line item, challenging the traditional practice of attaching a spreadsheet to an invoice. This shift could significantly impact the cost, processing, and validation of billing and invoicing activities for any other stockbrokers pursuing acquisitions.
As the industry grapples with these challenges, one thing is clear: transparency remains paramount.
While it remains uncertain whether many investment managers will adopt this meticulous approach, large firms must prepare for potential changes. If even a few asset managers enforce this model, the old practice of creating a spreadsheet becomes unsustainable. Asset managers will in all likelihood start assessing the worth of every line item, leading to a fundamental shift in how the industry values research on a daily, monthly, and quarterly basis.
In an ideal world, the prospect of “line by line” reconciliations is unappealing to both brokers and their clients. However, the reality is that fund managers will scrutinize each line item due to the costs they need to manage – especially with recent rule changes to small caps adding another layer of complexity. Large players eyeing acquisitions of smaller-cap firms must equip themselves with the capabilities to meet the evolving research demands of their clients, and not forgetting the regulators.
Take the not so small matter of the Investment Research Review – established by the UK Government in March 2023 to consider levels of financial services investment research and its contribution to UK capital markets competitiveness. The findings included this rather specific idea of “optionality” for investment managers. This is a concept of where a potential softening of existing FCA rules on unbundling would even facilitate a reversion back to using underlying client commissions to pay for research.
Initially, the idea of moving away from funding the research budget with anything other than their own P&L was resolutely dismissed. But more recently, the sentiment has shifted, and some asset managers are even exploring having early-stage conversations with their clients. So, will we move back to asset managers using a commission sharing agreement (CSA) mechanism to pay for their research, with transaction fees funding the research pot? Perhaps, but as ever, the devil is in the detail, and it is not without its complications. For instance, will the underlying funds pay for the research, or will a CSA rebate function win out? Will this move to optionality suit all participants?
Research budgeting is here to stay, regardless. With asset managers having overhauled their processes for funding and paying for research to meet MiFID II requirements just a few years ago, it could be costly and time-consuming to update their set-ups, structures, and regional approaches all over again. As the industry grapples with these challenges, one thing is clear: transparency remains paramount. Whether through meticulous line-item assessments or innovative approaches to billing and invoicing, UK brokers must adapt to the changing demands of regulators and their clients.
Daniel Carpenter is CEO of Meritsoft (a Cognizant company)
Broker tie-ups could be the straw that broke the research camel’s back
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24.01.2024
Brokers in the Square Mile are facing a time of unprecedented change – and research may change, too, if the Panmure Liberum tie-up indicates the future Nothing like a blockbuster merger to kick-start 2024. In a move that signals ongoing consolidation in the City, Panmure Gordon has merged with its longstanding rival Liberum. This alliance comes at an interesting time for an industry continuing to grapple with diminishing research fees, not to mention a general slowdown in activity within UK capital markets.
Traditionally, City brokers have been integral to the advisory process for UK Plcs, often providing their expertise for nominal fees. However, the implementation of MiFID II back in 2018 triggered a persistent squeeze in investment research budgets, leaving those brokers providing analyst reports, struggling to maintain their traditional role. This latest merger represents another step in the consolidation trend, which also saw Charles Schwab acquire TD Ameritrade back in 2019, further limiting the available research options for investors. The issue is that as brokers converge, they often consolidate research coverage for the same asset class.
The impact on fund managers is noteworthy, as the merging brokers might offer different research rates depending on the nature of their interactions. In a........
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