In a significant policy reversal that is reshaping London's financial landscape, asset managers are increasingly passing research costs directly to their clients, effectively dismantling one of Mifid II's core provisions. This strategic shift marks a dramatic departure from the unbundling requirements that have defined European financial regulation since 2018.
The Unbundling Experiment and Its Consequences
When Mifid II came into force in January 2018, it fundamentally transformed how investment research was paid for across European markets. The legislation mandated that asset managers must separate research costs from trading commissions, requiring them to either absorb these expenses directly or establish explicit research payment accounts funded by clients.
This unbundling initiative was intended to enhance transparency and prevent conflicts of interest, but it produced several unintended consequences that have reshaped the research ecosystem. Many buy-side firms found the compliance burden overwhelming, while sell-side research providers saw their revenues decline sharply as money managers became more selective about their research consumption.
The Great Research Cost Transfer
Recent industry analysis reveals that a growing number of asset management firms are now implementing client-paid research models, effectively transferring these costs back to their investors. This movement represents a pragmatic response to the operational challenges and financial pressures created by the original Mifid II framework.
Several major investment houses have already notified their clients that research expenses will now appear as separate line items on their statements. This approach allows asset managers to maintain access to crucial market analysis while making the cost structure more transparent and manageable for their businesses.
The shift is particularly pronounced among firms managing assets for institutional clients, who often have the sophistication to understand and evaluate research value independently. However, the trend is also beginning to emerge in the retail investment space, albeit with more careful implementation to ensure client understanding and compliance with consumer protection regulations.
Market Impact and Future Implications
This reversal is already generating significant ripple effects throughout the financial research industry. Research providers who struggled under the post-Mifid II revenue compression are now seeing more stable demand for their services, though the pricing pressure remains intense.
The quality and depth of available research had noticeably declined following the initial implementation of unbundling requirements. Many smaller and mid-sized brokerage firms either scaled back their research operations or exited the business entirely, reducing the diversity of analytical perspectives available to investors.
Market participants are watching carefully to see if this cost-transfer trend will become the new industry standard. Early indications suggest that client pushback has been relatively limited, particularly when asset managers clearly demonstrate the value that external research adds to investment performance.
Regulatory authorities are monitoring these developments closely, though no immediate intervention appears forthcoming. The Financial Conduct Authority has acknowledged the practical challenges created by the original Mifid II research provisions and seems inclined to allow market participants to develop workable solutions.
As the industry continues to adapt, the evolving approach to research costs represents another chapter in the ongoing refinement of financial regulation. The experience demonstrates how market participants will eventually find pragmatic solutions, even when operating within complex regulatory frameworks designed with different objectives in mind.
