Vanguard to pay for research costs, piling pressure on rivals
US index funds manager is the latest to announce how it plans to pay for analysts' research under new EU regulations
Vanguard, the US asset manager that has upended the industry with its low-cost investment mantra, is to stop charging investors for analyst research ahead of new rules that are set to dent the profit margins of European fund managers.
The $4.4tn investment company has said it will cover the cost of using external analyst research from its own pocket in a move that is expected to force its rivals to do the same.
The switch comes ahead of new rules, which fall under Europe’s overarching Mifid II, that will bring to an end the decades-long practice among fund managers of lumping together the fees they pay investment banks for research and trading. Investment managers will now have to present clear budgets for the cost of research to their investors.
“We will not charge investors for external research,” said Vanguard. “Any associated costs will be absorbed by the business, not by clients.”
So far only a handful of European asset managers, including Jupiter Fund Management, M&G Investments and Aberdeen Asset Management, have said they will absorb the cost of research themselves. Vanguard’s announcement is expected compel others to follow suit.
“This will pile on the pressure,” said Amin Rajan, chief executive of Create Research, a consultancy used by investment managers. “This trend will gain traction on both sides of the Atlantic. As regulators demand more transparency around costs, asset managers don’t have much choice.”
The move comes at a difficult time for investment companies, which are being scrutinised by regulators globally over the fees they charge and bumper profits being made.
In June the UK financial regulator issued a damning verdict of the highly prosperous sectorand proposed a number of far-reaching reforms to stamp out conflicts of interest and restore trust in the market, exacerbating existing challenges from the rise in popularity of passive investing.
The watchdog’s most controversial reforms include forcing investment managers to present investors with an all-encompassing fee – a measure the industry fought hard to avoid – and to put two independent directors on fund boards.
Marina Cremonese, an analyst at Moody’s Investors Service, said: “The FCA remedies will likely result in higher compliance and operational costs while fees come down. This will negatively pressure asset managers’ profit margins, and attempts to manage costs and reduce expenses could translate into market consolidation.”
Mifid II comes into force at the beginning of next year and will put an end to the practice of investment banks giving away stock research to fund managers for free, in return for fund managers placing trades with them. Instead, fund managers must either pay for the research themselves — treating it essentially as a cost of doing business — or set up new administrative structures that keep a track of the fees paid.
Vanguard said the change will only affect its funds in Europe and will cost the company around $5m a year. Its plan was first reported by the Financial Times.
Neil Woodford, Britain’s most celebrated fund manager, became one of the first investors to stop charging clients for research. In April last year, Woodford said his company would use its own money to pay for research used to run the group’s flagship fund. “We are acutely aware that it is investors’ money, not ours, we are investing,” said Craig Newman, chief executive at Woodford Investment Management at the time.
Research costs run into billions of pounds industry wide. The UK regulator estimated that £1.5bn of investors’ money — over and above charges that savers agreed to pay to investment managers — was spent on investment research in 2012.