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  • Abdul Tambal

The Future of Equity Research - Impact of Mifid II Regulations

What is Mifid II?


The future of the investment research industry has been in question since the 2018 implementation of Mifid II regulations in Europe. The regulations were crafted with the intent of making financial markets more transparent, competitive, and stable. This would partly be done by forcing money managers to explicitly disclose how much they actually pay for research.


Historically, the cost of equity research to fund managers was “bundled” together with the fees they would pay their brokers for transaction costs when trading securities.


The idea behind introducing these regulations is to reduce the potential conflict of interest between fund managers and their clients, which may arise if certain fund managers route trades through brokers that would charge higher execution fees than competitors. Brokers would support their higher fee structures by providing supplementary offerings including research by their equity research departments.


What Does Mifid II Actually Mean for Equity Research?


Mifid II regulations would impact institutions involved in trading securities that service clients adhering to Mifid II regulations, which are primarily located in Europe. This would force banks to explicitly disclose the cost of equity research which will have to be paid for separately, either through hard-dollar payments or “Research Payment Accounts” by asset managers. While these rules are focused within Europe, they have impacted the way business is conducted globally, as asset managers in different geographies are now focused on how much money they spend on research services.


This means that brokers might not necessarily be able to pass on the cost of research to their clients through higher commissions, making asset managers reconsider their direct cost to the service.


While these regulations might seem negative to sell-side equity research, they also present some opportunities for the space.


Are There Positive Impacts of Mifid II on Equity Research as a Career Path?


While overall spending on sell-side equity research from asset managers will be pressured as a result of these regulations, some providers of research are likely to see an increase in demand depending on their service offerings.


Sell-side research teams publishing high-quality research could see their market share grow. In practice, this would mean consistently publishing differentiated research that helps clients outperform their benchmarks by following the research team’s advice.


The chart below shows data gathered by a 2019 study from the CFA Institute, which asked participants about how their research consumption habits have changed since Mifid II regulations were enacted.


From the perspective of the buy-side (meaning actual asset managers), 49% of participants responded that they were relying on their own in-house research as much as they were before, implying that they still resorted to external research to meet their needs to the same degree as before.


Amount of Research Used by Asset Managers (In-House)
Amount of Research Used by Asset Managers (In-House)


More notably, 14% responded that they spent more money on in-house research, which would be generated by research analysts employed directly by funds.


These are the types of jobs that investment bankers and equity research analysts would typically exit into when pursuing jobs in the buy side.


What This Means for Candidates Pursuing Careers in the Industry


Compare the chart above with how payments to investment banks’ research departments have changed as shown below. From the same survey, we can see that 18% of participants reported spending fewer dollars on equity research generated by investment banks.



Amount of Research Used by Asset Managers (from Investment Banks)
Amount of Research Used by Asset Managers (from Investment Banks)


This shows us that hedge funds and other asset managers may be reallocating funds away from the sell side to the buy side, creating more opportunities for candidates to work as part of the investment business conducting research on investable securities.


This suggests a positive trend for those seeking employment within the sell-side now (where it’s still entirely possible to make ~$300k within 5 years of experience in current conditions) as there may be more demand for the same skillset at higher-paying buy-side firms.


Check out our course on equity research to help you gain the skills to break into the industry and stand out from the competition.


Some firms may also allocate more funding to recruit talent directly out of university. As an example, the hedge fund Point72 Asset Management has launched Point72 Academy, which is an investment analyst training program that often recruits inexperienced candidates.


Conclusion


Sell-side equity research continues to evolve, partly driven by the reallocation of funds by asset managers as a result of Mifid II regulations. While the impacts of these regulations have resulted in the shrinking of the industry from previous years, they present an opportunity for candidates seeking employment as investment professionals by potentially expanding the opportunity set of high-quality buy-side research jobs for which the required skillset is nearly identical.