Pay-to-Parlay's Nasty Side Effect

(Bloomberg Gadfly) -- With fewer than 50 days remaining until MiFID II imposes sweeping new rules on the financial industry, much attention has focused on the requirement to pay for research. But there's another rule which could, at worst, inhibit smaller asset managers from adding new companies to their portfolios.

Picture the scene. A portfolio manager at a small investment firm is considering buying shares in a small company. After running the numbers and reading the analyst research, the final step before allocating capital is typically a one-on-one meeting with the senior management of the company.

Pay-to-Parlay's Nasty Side Effect

Contact with company management was ranked as the most critical factor in deciding whether to invest in a company, according to a survey earlier this year by Capital Access Group, which advises companies on their communications with investors.

In the past, that meeting would have been arranged by a brokerage firm, which would recoup the costs from future trading commissions. The Markets in Financial Instruments Directive, however, seems to oblige the investor to pay for that corporate access at what the European Securities and Markets Authority calls a "commercial" rate.

Pay-to-Parlay's Nasty Side Effect

Investors are distinctly reluctant to bear that cost, according to a second report by Capital Access, which surveyed 56 firms managing almost 190 billion pounds ($250 billion) in U.K. equities.

The costs of meeting the new rules are already substantial. Crux Asset Management, which manages about 2 billion pounds, told Money Marketing magazine this week that MiFID will cost the firm 430,000 pounds next year; it's raising its fees in response.

So it's shocking, but not surprising, that of the 22 percent of fund managers in the survey who said they would pay for corporate access, fewer than a third were willing to pay more than 250 pounds for the privilege.

To be sure, the regulator says investors will still have the option to meet with companies directly or through a third-party access provider that provides only that service. (And one of those companies hoping to do that is Capital Access, so it has rather a large dog in this fight.)

But both those options will still run into the reluctance of investors to pay. Funds may try to persuade companies wanting to attract new investors to their share rosters to bear the cost. Except they, too, are reluctant to pay for meetings set up by go-betweens, according to a report by consulting firm PwC.

The finance industry is belatedly waking up to some of MiFID's more unpleasant implications. As Bloomberg News reported this week, Toscafund Asset Management wrote to about 30 small and mid-sized companies arguing that they need to pay for research about themselves or risk being abandoned by investors because of a lack of analyst coverage under MiFID.

For bigger investors, getting direct access to senior company managers isn't a problem. It's the smaller asset managers, short of resources and already struggling under the increased regulatory burden of MiFID, who may decide it's not worth the hassle and expense of securing the access they need before adding a new stock to their portfolios.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Mark Gilbert is a Bloomberg Gadfly columnist covering asset management. He previously was a Bloomberg View columnist, and prior to that the London bureau chief for Bloomberg News. He is the author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable.”

To contact the author of this story: Mark Gilbert in London at

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