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 industry, according to a new credit rating note published by Moody’s Investor Service.
Having performed a sector review, the rating agency has concluded that the new regulatory regime is “credit negative” for the industry as it will “intensify fee competition” and encourage a shift to passive funds.
Among the key points noted include:
- The attraction of ETFs will grow. Cost transparency and a ban on commissions paid to independent financial advisors will encourage greater use of cheaper passive funds by retail investors, including exchange-traded funds (ETFs). All ETF trades will need to be reported for the first time, and full ETF trading volumes and liquidity figures provided, prompting greater ETF usage by institutional investors.
- Better cost transparency and product comparability will intensify fee competition. Strict disclosure requirements for costs and charges, and new product governance rules, will make it easier for investors, independent financial advisors and competitors to compare investment products. We estimate asset managers’ effective fee rate could fall 10% to 15% over the next three years.
- 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 will push asset managers towards more outcome-oriented, bespoke investment solutions 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. Most asset managers will now pay for investment research they receive from brokers. The importance of scale in absorbing these costs means smaller players will bear the brunt, likely driving consolidation.
Marina Cremonese, a vice president and senior analyst at Moody’s, and 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