BlackRock and Peers Slash Research Budgets as New EU Rules Squeeze Brokers

BY JOSEPHINE MASON

LONDON (Reuters) – BlackRock and other investment houses have slashed their budgets for external research by as much as half after the introduction of new European Union rules, piling pressure on stockbrokers, a senior executive at the world’s top asset manager said on Tuesday.

The EU’s Markets in Financial Instruments Directive II, known as MiFID II, which took effect in January, states investment research must be priced separately from other broker services to ensure transparency and better value for money.

With the rules making clear how much investors are being charged for research, many asset managers are scrutinizing more than ever what they’re paying for and using less.

“It’s really clear the amount being paid is 30-50 percent lower and that’s staying there,” Nigel Bolton, chief investment officer of international equities at BlackRock, told Reuters on the sidelines of a briefing on Tuesday.

“A lot of people are waiting for it to get better, but I don’t think it will. Budgets are down and aren’t going to come back up.”

The sweeping changes in how asset managers consume research will underscore concerns about pain being felt across European equity research providers almost a year after MiFID II came into force.

Stockbrokers have been the main losers from the new legislation, Bolton said, echoing a sentiment across the financial sector.

“We basically think twice before having a meeting (with a stockbroker), and we share meetings,” Bolton said.

Verena Ross, executive director of the EU’s European Securities and Markets Authority, which is overseeing the implementation of MiFID II, said the watchdog was closely monitoring the market’s concerns about research.

“The landscape is changing and that has some implications, but at the same time the evidence from the data is not particularly firm yet,” she told a conference in London.

The watchdog will look, in particular, at whether there is sufficient coverage of small-cap companies, she said.

The cuts are likely to drive consolidation as small- and medium-sized brokerages struggle with the loss of research income and falling commission fees amid growing competition, experts say.

The comments come after reports last month that Australia’s Macquarie was in talks to buy boutique London-based broker, Liberum, in a bid to strengthen its UK equities business as MiFID II forces it to pay for research.

German private bank Berenberg has laid off staff in its equities business amid pressure from MiFID II, the Financial Times reported last month.

“We haven’t seen the mass cull I’d expected. We’ll see more mergers (in 2019),” BlackRock’s Bolton told a briefing earlier on Tuesday. He is also co-head of fundamental equities and head of the European equities team at the world’s top asset manager.