MiFID II rules could force active fund managers to cut fees further, research compiled by ratings agency Moody’s has said.
The report describes MiFID II as a ‘credit negative’ for the asset management industry, which will intensify fee competition and accelerate the shift into passive funds.
Moody’s said: ‘MiFID II requires asset managers to provide their clients with detailed information on costs and charges paid for the provision of investment services.’
As a result investors can now easily compare product costs.
Moody’s believes this will increase pressure on UK fund firms – which on average shaved between 15 and 20 basis points from their ongoing charges between 2013 and 2015 following RDR – to reduce costs once again.
‘MiFID II will affect active management as well as institutional assets, and European asset managers’ effective fee rates could fall 10% to 15% as a result, depending on their asset allocation and on their responses to ongoing pressures,’ Moody’s said.
‘Asset managers will likely respond by narrowing the range of products they sell, and will likely be forced to consider closing funds that have been consistent underperformers.
Moody’s said such measures, along with cost saving initiatives, innovative investment solutions and possibly M&A, will offset some of MiFID II’s negative effects and therefore limit their impact on margins.
Moody’s also predicts fund managers will transition from providing single-point-of-sale products to providing investment solutions as ongoing services.
‘MiFID II requires asset managers to ensure their investment products meet the needs of investors with risks properly communicated,’ the report stated.
‘This will push asset managers towards more outcome-oriented, bespoke investment solutions that aim to meet investors’ financial goals, instead of benchmark-beating strategies.’
Another pressure imposed on asset managers by the EU regulation is the taking on of research costs, which Moody’s estimates could add another 5% to costs.
The report also suggested MiFID II would accelerate the shift to passives and leave smaller firms out in the cold.
As a consequence the margin squeeze forced by the new regulation will continue to drive consolidation among smaller players.
‘Most asset managers will now pay for investment research they receive from brokers. The importance of scale in absorbing these costs means smaller players will bear the brunt, likely driving consolidation.’
The report also highlights how the costs of transparency and a ban on commissions paid to independent financial advisors, imposed by MiFID II, will encourage greater use of cheaper passive funds by retail investors, including exchange-traded funds (ETFs).
‘In Europe, banks dominate retail distribution and have had less incentive to sell ETFs that do not bring in large commissions. MiFID II’s increased transparency will change this.
Moody’s claims this trend already manifested itself in the net new flows over the first six months of 2017.
‘In Europe, asset managers with the highest net inflows saw a substantial portion allocated to passive strategies, including ETFs. UBS attracted CHF29.9 billion (£22.5 billion) in net inflows during the period, the largest amount of our surveyed group.’
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