Vanguard to absorb research costs; but so what?

Added 7th August 2017

Vanguard Investment Management is the latest manager to announce it will absorb external research costs under the new Mifid II research "unbundling" rules. But will this have an impact on undecided industry players?

Vanguard to absorb research costs; but so what?

Vanguard confirmed over the weekend that it will cease charging investors for external research provided by banks and brokerages to comply with the new Mifid II directive, becoming the first mega US manager to do so.

The decision will cost the $4.4tn manager roughly $100m annually. 

Under Mifid II, investment firms have the option of absorbing analyst research costs themselves or continue passing it along to investors via a research payment account.

The Financial Times declared on Sunday that Vanguard’s decision would prove to be a “disruptive force for the industry,” making it “harder for rival fund companies to justify passing on the cost to investors”.

But Vanguard is far from the first manager to choose to bear the cost of analyst research going forward.

Rathbones, Jupiter, M&G and Aberdeen, to name a few, have all announced they will not be transferring research costs onto the end investor.

However, there are a number of fund houses, including Europe’s largest investment manager, Amundi, as well as Henderson, Man Group, Invesco and Schroders who have said they will not absorb external research costs themselves.

Chris Turnbull co-founder Electronic Research Interchange, said Vanguard’s decision will inspire other undecided fund groups to action.Tthe problem is “the majority of managers will not have the same capacity to pay for investment research as Vanguard,” he added.   

“Small and medium-sized managers are the group most likely to be impacted, and least prepared, for the new unbundling rules. With limited time to make decisions on the future of their investment research procurement, many managers will be looking across the industry for examples they can follow.

“It is unlikely Vanguard, as one of the world’s largest active managers, will provide that template,” he continued.

“Research is not a one-size-fits-all approach, which is why managers must start as soon as possible to determine their organisation’s unique requirements.”

That hasn’t stopped boutique bond specialist TwentyFour Asset Management from taking on the external research costs itself.

In an update to investors, the asset manager called the unbundling conundrum a “legacy issue of how equity markets used to be traded”. 

“At TwentyFour we have embraced a lot of this already and have been paying for external research for years, so this is nothing new to us,” the firm said.

“In fact, we are optimistic that the research offering from the banks and brokers might actually improve under Mifid II once their clients have to pay for it, so we welcome it despite the additional costs.”

With a world of independent research at fund managers’ fingertips, banks and brokers providing external research will need to ensure consistent quality if they want to survive, it argued.

Also, the fixed income manager argued that added transparency and transaction reporting could prove “an ancillary windfall benefit to liquidity”.

“We have often said in the past that the plumbing through which we trade fixed income products over the counter was lacking in transparency, which must have a knock on impact for liquidity.

"By posting trades as they are executed in a timely manner, the transparency will be greatly improved and we no longer have to rely on individual banks and brokers posting trades that suit them.

“Everyone will have access to the same information almost in real time. This is potentially the best news for fixed income investors, no matter where in the chain they sit."

There are still a number of industry players, including Franklin Templeton, JP Morgan Asset Management, Fidelity International and Columbia Threadneedle, who have yet to make a decision on the new unbundling rules.  

BlackRock, arguably Vanguard's biggest rival in terms of size and market share, has yet to make a decision on its research unbundling.

A spokesperson from the asset manager said: BlackRock continues to work through the implementation of Mifid II globally with our clients’ best interests in mind, and we will share our proposal for research in due course”

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About Author

Kristen McGachey

Senior Reporter

Kristen joined Last Word Media and the world of financial journalism in April 2016, leaving behind a career in a legal publishing firm as a senior researcher turned assistant editor.

This native Angelino initially moved to the UK in 2008 to complete her undergraduate studies at the University of Nottingham. She subsequently obtained a Masters degree in Philosophy with Literature from the University of Warwick.



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