NEW YORK/LONDON (Reuters) - BlackRock Inc BLK.N will consider paying out-of-pocket for the investment research the world's largest asset manager consumes from banks globally, Chief Executive Larry Fink said on Wednesday.
Currently big investment banks and brokerages send research notes on companies for free, with brokers recouping the cost through fees for handling trades for the asset managers.
Yet a sweeping set of European Union rules due to take effect in January include a requirement for asset managers to agree on a price for research with brokers and either pay for it themselves or pass it on to investors.
Most companies in Europe have agreed to assume the cost themselves, although leading U.S. fund houses have so far tended to do so only for clients in products directly impacted by the EU rules, the Markets in Financial Directive II, or MiFID II.
A move by BlackRock, with nearly $6 trillion in assets, to pay for research globally and rely less on banks for investment ideas could spur its competitors to follow suit and ripple across a Wall Street already bloodied by declining stock trading fees.
Asset managers paying for external research may be more selective about what analysis they want from brokerages, and may decide to produce more themselves, analysts said. That could pinch underperforming investment bank research and trading units, while boosting boutiques with strong research but no trading operations.
“One should expect we will be addressing this worldwide,” Fink told Reuters in an interview. “We’re going to be looking at it.”
After BlackRock announced last month plans to absorb costs of external research in the EU, several smaller competitors such as Goldman Sachs Asset Management GS.N and HSBC Global Asset Management HSBA.L said they would do the same.
Already, brokers are wrestling with declining stock-trading commissions with volumes low as calm stock markets glide higher and competitive electronic markets whittle away fees.
BlackRock slashed the amount it paid out in commissions to Wall Street firms for research by more than half for its largest mutual fund, Global Allocation Fund MALOX.O, over the last two years, Reuters reported earlier this year. Fink said in July that the company had reduced the cost of trades by 80 percent in five years.
Big firms like BlackRock can also afford to build their own research units in-house, and they are doing so. They already employ more than 300 research staff.
On Wednesday, Fink told analysts on a conference call tied to its third-quarter earnings report that doing even more research in-house “will allow us to have more incremental and differentiated ideas,” potentially boosting returns.
“It is my belief by having more proprietary research that we are going to have better active flows.”
U.S. brokerages are prohibited from taking direct payment for research unless they are also registered as investment advisory firms, according to securities lawyers. The U.S. Securities and Exchange Commission, which regulates brokers and asset managers, has not yet detailed plans to harmonize its rules with the European Union.
Fink said BlackRock faces no timeline for a decision and is discussing the issue with clients.
“We look at this as an opportunity, and we’re treating it as an opportunity,” he said during the conference call, adding that “we have to see how MiFID II works out in the European environment for us to have a real strong opinion globally.”
Fink said he does not yet have a view on whether MiFID II should be a template for the rest of the world. One concern is that smaller public companies and private companies considering offering stock are getting less attention as equity research groups pull back from following lesser-known companies.
“We are worried about what the impact will be with some of the small-cap companies that will - are - having trouble ... in getting people to follow them,” Fink said.
Reporting by Trevor Hunnicutt in New York and Simon Jessop in London; Editing by Jennifer Ablan, Andrew Hay and Jonathan Oatis
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