Moody’s sees MiFID II driving consolidation

Consolidation of the European asset management industry is likely to accelerate because of the effects of MiFID II on the companies that operate within it, according to a new credit rating note published by Moody’s Investor Service.

Having completed a review of the sector, the rating agency has concluded that the new regulatory regime, formally known as the European Union’s second Markets in Financial Instruments Directive, is “credit negative” for Europe’s asset management industry, as it will “intensify fee competition” and encourage further the shift to passive funds.

Indeed, new, stricter disclosure requirements for costs and charges, alongside new product governance rules, will make it so much easier for investors, independent financial advisers and competitors to compare investment products that Moody’s is estimating the effective fee rate charged by asset managers  “could fall 10% to 15% over the next three years”.

Among some of the other key points noted by Moody’s in its latest credit research note:

  • The attraction of exchange-traded funds (ETFs) will grow. Cost transparency and a ban on commissions paid to independent financial advisers will encourage greater use of cheaper passive funds by retail investors, includingETFs.Under MiFID II, all ETF trades will need to be reported,  and full ETF trading volumes and liquidity figures provided, prompting, Moody’s says, greater ETF usage by institutional investors.
  • Asset managers will transition from product manufacturers to “solution providers”. MiFID II requires asset managers to ensure their investment products meet the needs of investors, with risks properly communicated. This, Moody’s says, will push asset managers towards more outcome-oriented, bespoke investment products, that aim to meet investors’ financial goals, instead of benchmark-beating strategies.
  • “Margin squeeze” will drive consolidation among smaller players. MiFID II’s sweeping reforms bring heavy one-off implementation costs and ongoing compliance expenses, Moody’s points out. At the same time, most asset managers will now be paying for investment research they receive from brokers. The importance of scale in absorbing these added costs, it points out, means smaller players will bear the brunt of the squeeze, fueling consolidation.

Marina Cremonese, a vice president and senior analyst at Moody’s, who worked on the report, said: “The introduction of MiFID II will put pressure on asset managers’ profits by lowering their effective fee rate and increasing their costs.

“However, cost saving initiatives, new investment solutions and M&A will likely offset some of the negative effects, limiting their credit impact.”

The full report is available at: http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1100327

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