From $1,600 to $1 Million: Research Costs Under MiFID II

(Bloomberg) -- How much does investment research cost? Anything from $1,600 to $1 million per client on average.

That’s the range of annual payments institutional investors doled out to providers, according to a new survey by U.S. consulting firm Integrity Research Associates LLC. The study sheds light on the black box that is research pricing, after 2018’s European regulations known as MiFID II forced investors to unbundle such payments from trading fees.

The survey shows research shops in Europe are making less than peers elsewhere, adding to signs the new rules have shrunk budgets for stock and bond analysis. Having opted to pay for research out of their own pockets rather than clients’, asset management firms in the region are squeezing providers for every penny. While there’s often a set price for reading reports, everything else -- analyst calls, bespoke financial modeling, conferences -- is mostly up for negotiation, leading to a wide range of costs.

“In the end the explicit pricing only came to the entry fee and the written research,” Sanford Bragg, principal at Integrity Research, said in a phone interview. “It really still is a function of that negotiation, and obviously the trend since the global financial crisis has been for the buy side to pay less.”

Europe’s experience is especially relevant as U.S. regulators also field growing calls for similar rules designed to make fees more transparent. The survey also shows banks get bigger checks overall from clients than independent research providers, lending credence to the argument that unbundling has put the latter at a disadvantage.

Here are other highlights from the global survey, which polled 141 providers in the third quarter:

Regional Breakdown

The survey adds to signs that MiFID II has put pressure on the amount European research providers charge clients. The median average payment in that region was $25,000, about 40 percent lower than in North America and 29 percent lower than in Asia.

From $1,600 to $1 Million: Research Costs Under MiFID II

Pricing Model

Among a variety of fee structures, the subscription model is gaining favor. Eighty-seven percent of respondents charged for subscriptions, compared with 60 percent in Integrity’s early 2017 survey before MiFID II took effect. But that’s not how the banks make big money. While subscriptions are typically for written research, the most valuable clients paid variable fees for so-called “high touch services” such as analyst access, according to Integrity.

Many providers still use a “price taking” approach that lets the buy side determine prices. Some charge fees by the hour or project.

Independents vs Investment Banks

Independent research providers have urged regulators to crack down on “predatory pricing” from investment banks. The survey shows banks charge a median subscription fee of $14,000, compared with $30,500 for independent shops. Still, banks got bigger checks from clients across a broader range of services: their median maximum payment stands at $300,000 per client, double that for independents. Under MiFID II, many banks are using cheap research reports to lure clients to pricier services, Bragg said.

Payment Method

Median responses show 60 percent of research revenue was paid in cash, 30 percent in commission sharing agreements and 10 percent from directed commissions.

Special Extras

How much does it cost to talk to an analyst? Anything from $100 to $5,000 per hour. For events, it’s $100 to $100,000.

Research Types

On the cheaper end, there’s technical and macro research. On the high end, there’s quantitative research and alternative data. Those charging for their macroeconomic insights might be at a disadvantage because MiFID II allows free research as long as it’s publicly available, and many European banks have chosen to give away macro reports for free, according to Integrity.

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