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Backdoor Unbundling

I was relaxing on my way home on the 7.02 from Waterloo last night when I came across Nick Goodway’s excellent article in the London Evening Standard on the impact of unbundling and research procurement. As everyone knows, ESMA wants to make sure that transparency rules the day when it comes to how investment managers use client money, especially when it comes to paying for research via trading commissions. A noble motive indeed but one that, as Nick points out, is fraught with unintended consequences. I fear, though, that the shakeup may be even bigger than we imagine and will reverberate not just in Europe but globally. The problem is this – it will simply be impossible for global investment managers to operate multiple and yet completely conflicting systems for research procurement. Impossible to manage, impossible to audit and worst of all, impossible to explain to their own clients. The only solution they have, therefore, is to solve for the highest level of regulatory hygiene required and adopt unbundling globally. This will serve to introduce major market change into the US, for example, in an area where the SEC has absolutely zero interest in changing the status quo. As an interesting aside, a colleague told me that due to some quirk in the legislation, it would probably be easier to introduce gun control in the US than to usurp an investment manager’s right to pay for research in client commission!

So where does all this leave us? The nightmare scenario is that every buy- and sell-side adopts their own unilateral approach to research procurement and provision. This will not only drive up complexity, and therefore costs, but will do little for the transparency so desired by the regulators.

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