Buy-side Perspectives Issue 3 - Page 20

One of the challenges to the Swedish model is that if a fund turns over nothing at all, the trader might ask why they are paying for research. Under the old model, they would not have paid anything in that situation. But under the new model, they will still pay for research if they consume it. The benefit compared to the old system however is that if there was high turnover, the trader would pay far more for research, whereas under the new model this is not the case. “The research might tell you not to trade,” said Lindh. “Staying put might be the best choice. So the new system is more fair, because every end client pays exactly the same.” There are areas however where the model can still be improvednotably, the implementation of the Swedish model currently does not track research payments for each and every fund. Swedbank currently argues that it is not necessary to go into each individual fund because of the linked nature of the process across the whole asset management team. In future, it is possible that RPAs could be created for every fund. In addition, while large firms have the resources to make the model work, Lindh acknowledges that smaller ones might not. Fund owners may find it easier to adopt the model, since they don’t have to negotiate with clients and can act independently. However, Lindh is upbeat about the prospects for overcoming these obstacles in the future. 20 The Buy-side Perspectives | Issue 3 | April 2016 “The weaknesses can be solved,” he said. “There are issues, but there’s always room for improvement – it is not a problem.” Payment for research does have complexities – Lindh explains that the value of a piece of research might be $10,000 for one firm, but ten times as much to another. Then there are other contextual factors like the time of day – a piece of research might be more valuable at 08.00 in the morning versus 16.00 in the afternoon. Demand also varies by subject from day to day – a steel analyst for example may be in demand one day, but overshadowed by the healthcare analyst the next. At Swedbank Robur, providers are asked to name their price, and then a decision is made. “The end customer has definitely benefitted,” said Lindh. “If you look what we paid bundled and what we pay today, we are paying less than we did before.” “But I still think people doing a good job on the research side are receiving more or at least the same as before, because we are concentrating our research payments in the best way possible.” In the Swedish RPA model, the entire research budget gets used – 100% is paid out each quarter and there are no surplus funds. If the amount is too high, the budget can be changed, but in general Swedbank Robur aims to keep to the budget decided at the beginning of the year. From a regulatory standpoint, MiFID II is likely to provide the final say on the role of CSAs. Lindh expects that Swedish regulator FI will accept whatever the conclusion of the MiFID II process is – a scenario which most likely means that in addition to the RPA model, there will also probably be CSAs. But Lindh is sure that the RPA is the better model. “I hope the Swedish RPA model is here to stay,” he said. “I wouldn’t like to take the CSA route, because RPA is much better for us.” “It might be difficult for some firms, for example UK asset managers with diverse client bases, but the other option is to pay for research from P&L, and I think that’s bad for the smaller asset managers – and it doesn’t change the cost for the client anyway. Our estimated market impact looks good, we feel we are doing the right thing. Not having to focus on anything but best execution helps.”