Greenwich Associates Estimates €1.7 billion in Annual European Equity Commissions at Stake in “Unbundling” Debate

Regulators’ upcoming decisions on the issue of “unbundling” will determine the fate of approximately €1.7 billion in European equity brokerage commission payments used by institutional investors to reward providers of equity research and advisory services. Believing that regulators may restrict or even prohibit the use of commissions to pay for research, investors are preparing to internalize some research functions and expect to increase the amount of “hard currency” payments to sell-side providers.  

In a new report, Payment for Research: The Calm Before the Storm,  released today, Greenwich Associates reports institutional investors paid brokers €3.4 billion in commissions on trades of European equities during the 12 months ended Q2 2015. Roughly 52% of that amount—or €1.7 billion—was directed to pay brokers and third-party research providers as compensation for research.

While €1.7 billion is a considerable sum, it is nonetheless far below peak levels and many brokers now do not see cash equity research on its own as a profitable endeavor. Many sell-side brokers have already responded to pressure on commission pools by downsizing and “juniorizing” research and distribution teams.

“Should regulatory changes drive down institutions’ overall expenditures for research, even a modest reduction likely will have a substantial impact on the availability of research,” says John Colon, Managing Director of Greenwich Associates Market Structure and Technology Practice, and author of the new report.

European equity portfolio managers and equity traders interviewed by Greenwich Associates expect new regulations to cause them to increase their use of in-house research and the use of hard currency payments to pay for research and advisory services. 

U.K. respondents were much more likely than their counterparts in continental Europe to expect an increase in hard currency payments. Institutional investors were mixed in their opinions of whether new rules would lead to a decrease in their use of research from global investment banks.

Impact of 2017 Implementation
Regulators are expected to publish MiFID II-delegated acts relating to payment for research this month. This will give investment managers and brokers greater clarity on the direction of regulation, but will also kick off a scramble to address myriad issues and put in place compliance processes by MiFID II’s January 2017 implementation deadline.

Greenwich Associates believes current broker vote processes and commission sharing arrangements bring structure to valuing and paying for research and provide investment managers with a high level of access and flexibility, while protecting the interests of their clients.

“Compared to the current broker-vote driven process of allocating payments, administrative burdens on investment managers will be huge,” says John Colon. “We believe that the new rules as currently discussed may cause institutional investors to cut down on the number of research providers they use simple as means of limiting administrative burden and costs.”