Banks' Last MiFID Tussle Leaves Resort Jamborees in Jeopardy
(Bloomberg) -- Every year in March, global investors and African companies gather at Sun City, a resort three hours by car from Johannesburg that features golf courses and a wave pool in a setting reminiscent of a lost paradise.
The event, organized by Bank of America Corp., is one of hundreds across the globe that money managers attend, at their own expense, to quiz senior executives about corporate strategy. Come next year, there may be an additional cost: brokerages may need to charge clients for arranging the face time with managers.
That’s because new European rules designed to improve transparency in financial markets will force investment firms to pay separately for client services they receive from banks and brokerages, rather than bundling them with trading commissions. While corporate access is among the most-valued services banks offer their buy-side customers, paying separately may prompt more investors and companies to engage without banks as middlemen.
“Banks are all charging for corporate access in some form,” said Chantal Brennan, research director at Dublin-based Davy Asset Management, which oversees 3.7 billion euros ($4.4 billion). “If prices are unreasonable, we would have to look for an alternate solution.”
The new rules, known as the revised Markets in Financial Instruments Directive, or MiFID II, will go into effect in January. Unlike research, which most banks have priced by now in preparation for the new rules, the question of how and when to put a price tag on corporate access is in many cases still unresolved.
MiFID II places the onus on investment firms to decide whether corporate access is a “minor non-monetary benefit” that they’re allowed to receive for free, or whether it’s material enough to require payment, according to the European Securities and Markets Authority, or ESMA. Investment companies already pay for transportation and hotels during events such as the one in Sun City.
If corporate access is deemed substantive, agreeing on a price is the next hurdle. Goldman Sachs Group Inc. will set pricing based on a client’s past attendance at meetings, according to a person familiar with the matter.
Bank of America Merrill Lynch is handing out points to subscribers of its tiered research offering, which can then be used toward conferences and analyst meetings, according to a document seen by Bloomberg. Clients who pay $50,000 a year will get 100 points which they can allocate at their discretion, while the $70,000 package gets you 200 points. A conference goes for 10 points. Additional points can be bought.
Bank of America and Goldman Sachs declined to comment.
Other brokers say they don’t plan to charge separately, allocating meetings based on the importance of a client relationship.
“We don’t charge explicitly for corporate access,’’ said Robert van Brugge, chief executive officer at Sanford C. Bernstein & Co. in New York. “It is up to our clients to decide if it’s something of value that they are going to pay for explicitly, and there’s a huge range of opinions on that.”
Traditionally, corporate-access events were by invitation only for a bank’s best clients, providing an incentive for firms to do business with the lender. With MiFID II banning such quid pro quo and forcing firms to shop for the best available conditions, the cost of trading is expected to come down.
ESMA, the European regulator, recommends cutting out brokers altogether. Investors should meet directly with executives, or attend only events organized by companies that don’t provide other MiFID investment services, it said in a Q&A. That option is particularly appealing to firms big enough to have the ear of the companies they invest in.
“We are sizable,’’ said Daniel Roy, CEO at La Banque Postale Asset Management, which oversees about 217 billion euros in assets. “When we need to meet company management, they are kind enough to visit us, but for smaller managers it’s harder.”
John Gollifer, general manager at the Investor Relations Society, says he expects more direct engagement between companies and asset managers as a result. Investor relations officers have long complained that linking corporate access to a firm’s trading volume and frequency results in too many short-term investors attending events, rather than the buy-and-hold managers that executives tend to prefer.
“We expect that our relationship with the buy side may become even more direct,” said Peter Hutton, senior vice president in investor relations at Statoil ASA, the Norwegian oil company. “We do think there is going to be more to do.”
Where does this leave champagne and spa retreats? They’ll be hard to do going forward unless they’re low-cost events, organized in-house instead of at fancy hotels, said one banker who organizes roadshows for investors, and who asked for anonymity.
“The buy side often took advantage of those perks, always hoping to pay with trades or other means and often not doing so,“ said Geoffrey Mills, a London-based sales director at brokerage firm Oppenheimer. Now, “there won’t be this grey and fuzzy area which had been the hallmark of the bundled world.”
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