Investment research budgets are increasing in 2024, particularly in the US, signalling a market rebound, but the potential implementation of the Financial Conduct Authority’s (FCA) new payment rules could further reshape spending dynamics and competitive practices in Europe.
Substantive Research, a provider of research and data analytics for the buy side, has published the findings of its latest survey into investment research pricing, budgeting and consumption. The survey highlights a notable increase in research spending during the first half of 2024.
The survey reveals that research budgets are increasing both as a proportion of assets under management and in absolute terms. Specifically, US budgets have seen a substantial rise of 15 per cent, while European budgets have grown by a more modest four per cent. This increase signals a potential end to the cycle of continuous price depreciation and budget cuts that has dominated the market in recent years.
Mike Carrodus, CEO of Substantive Research, noted: “We saw last year that research budgets were stabilising, and now we have confirmation that the trend has turned. However, when compared with six years of price depreciation, this recovery does not take us anywhere near where research spending was pre-MiFID II.”
What is MiFID II?
MiFID II, or the Markets in Financial Instruments Directive II, is a legislative framework introduced by the European Union to regulate financial markets and enhance investor protections.
Effective from January 3, 2018, MiFID II brought about significant changes, particularly the unbundling of research costs from trading commissions. This meant that asset managers had to pay for research directly out of their own profit and loss accounts, rather than bundling these costs with trading fees.
This regulatory change led to increased costs for asset managers as they had to pay directly for research, prompting them to scrutinise and often reduce their research budgets. Consequently, research providers faced pressure to lower prices, resulting in a more challenging market environment.
FCA’s proposed changes
The FCA’s April 2024 consultation paper on Payment Optionality for Investment Research suggested enabling asset managers in Europe to pass research costs back to their end investors, reversing the post-MiFID II practice.
Analysis by the FCA indicates that while asset managers are largely getting the research they need under the current rules, these rules can be operationally complex and may favour larger asset managers. Additionally, the current rules can restrict UK asset managers’ ability to purchase investment research produced outside the UK.
The FCA’s proposal, part of the government’s Edinburgh reforms, aims to provide asset managers greater freedom in how they pay for research, supporting their investment decisions and promoting competition.
Research market
Substantive Research’s analysis for H1 2024 highlights several trends:
Overall budget increase: In monetary terms, global research budgets have increased by 2.2 per cent. This rise suggests a shift towards a more competitive environment where some providers are able to increase pricing and drive greater consumption of their services.
Broker dominance: Brokers continue to dominate research budgets, accounting for 85 per cent of the spend annually, though this is a slight decrease from 2023. Meanwhile, spending on tooling and analytics solutions has grown, now representing five per cent of research budget allocations.
Stable independent providers: Independent research providers (IRPs) and expert networks maintain their budget shares at eight per cent and two per cent, respectively.
The concentration of research budgets among the top 10 brokers has seen a slight increase from 54.8 per cent to 54.9 per cent. This metric will be crucial to monitor to determine if the FCA’s reforms achieve their intended effect of enhancing competition.
Carrodus added: “If this market is to reflate materially, there will need to be new demand for new asset classes and new supply required to justify additional payments in the future. A change in funding will not arbitrarily drive research pricing back to pre-MiFID II levels.”
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