Research Budgets

23 September 2015

In the UK the FCA say commission should be spent with the same care used when spending the firm’s own money. MiFID ll proposes that either managers buy research from their own resources or use money taken directly from funds via Research Payment Accounts.  These RPAs will be added to Ongoing Charges Figures at a time when managers are experiencing more pricing pressure. Going forward managers will need explicable budgets for research.

Our client is a fund manager with $45bn of equity assets in scope with around 80 portfolio managers and analysts in EU and non-EU Europe. The amount spent could not be related to the investment approaches of the managers or needs of clients.

Objective

Our client wished to:

  • Understand how their use and governance of dealing commission compared with developing good practice
  • Create a procedure for setting budgets that relates to their investment process which is commercially supportable
  • Have a clear policy on spending on research
  • Manage conflicts of interest

Investit Approach & Solution

  1. The first step was to use Investit’s Commission Analysis Service to gather base data about commission governance and the amounts involved (Investit has benchmarked over 20 firms and has data going back to 2011).
  2. To inform budget setting we ran a structured interview with each desk.  This is based on over 100 projects with PMs to help them explain investment processes to sophisticated buyers. From these interviews we gained comparable views of how and how many different sorts of research are used. This approach gains the buy-in of Portfolios Managers and CIOs.
  3. With a budget mechanism agreed we were able to write a policy and set out governance arrangements.
  4. We use the desk data and our inferred prices to create ways of budgeting that clients will be able to use now and in future.

Resulting Benefits

  • Our client now has a clear policy and set of procedures required by regulator and clients.
  • We were able to gather real prices and so we could determine what the firm needs to buy and how much to pay. Brokers have been unwilling to offer prices, but we have gathered real prices and inferred others that are used to set the budget.