Making Banks Charge Separately for Research Nobody Used to Price
A European rule forced investment banks to sell research and trade execution as separate products. Unbundling revealed how little research the market actually valued.
The Bundle
For most of the modern history of equities, investment banks provided research to their clients without a separate charge. Analysts wrote reports, hosted calls and arranged meetings with company management, and the cost was recovered through trading commissions. A fund that traded through a bank received its research as part of the relationship.
This is a bundle: two distinct products, research and execution, sold as one with a single price attached to the more measurable of them.
When a valuable thing is given away with a priced thing, nobody has to decide what the free thing is worth. Unbundling forces that decision, and the decision is often unflattering.
Why Regulators Objected
The bundle created a specific conflict. The commissions that paid for research were charged to the fund clients, meaning the ultimate investors funded research consumption they could not see or control.
A fund manager had an incentive to reward banks with trading flow in exchange for research and access, and the cost of that research fell on the fund investors through commissions rather than on the manager. Research consumption was, in effect, spent with other people money.
The European rules known as MiFID II, effective in 2018, addressed this by requiring research and execution to be priced separately. A fund had to either pay for research from its own resources or charge clients through a specific, disclosed research payment account with a budget.
What Happened When the Price Appeared
The result was revealing. Once managers had to pay explicitly for research, many concluded they were consuming far more than they needed.
| Effect | Observed outcome |
|---|---|
| Research budgets | Cut sharply |
| Number of providers used | Reduced |
| Coverage of smaller companies | Fell, less commercially viable |
| Price of research | Dropped, sometimes steeply |
| Independent research providers | Mixed, some gained, many struggled |
Many large managers chose to absorb research costs themselves rather than pass them to clients, which turned research from a client funded input into a direct cost on the manager own income statement. Predictably, they bought less of it.
The prices banks were able to charge, once explicit, came in far below what the bundled commissions had implicitly funded. Research the market had appeared to value highly turned out to command modest prices when it had to be bought on its own.
The Small Company Problem
The clearest casualty was coverage of smaller companies. Under the bundle, banks covered many small firms because research supported trading relationships and corporate finance mandates, even where the research itself was not directly profitable.
Once research had to pay its own way, covering a small illiquid company that generated little trading and few fees became hard to justify. Analyst coverage of smaller companies declined, which those companies argued reduced their visibility to investors and their access to capital.
This was an unintended consequence. The rule targeted a conflict in how research was funded and reduced the supply of research to exactly the companies that most needed the visibility.
The Geographic Complication
Because the rule was European, it created a mismatch with jurisdictions that retained the bundle. Global banks and asset managers had to operate different arrangements in different regions, and rules in some other markets initially made it difficult for local firms to accept separate research payments without being reclassified as advisers.
Temporary relief was granted to bridge this, and the episode illustrated how a rule aimed at a domestic conflict propagates through globally integrated firms in ways the original drafters did not fully control.
What It Demonstrated
The lasting lesson of unbundling is about bundling generally. A product given away inside a priced bundle can look far more valuable than it is, because no buyer ever had to weigh it against its price. Separating the two is a test, and research failed it in the sense that the market paid much less for it than the bundle had implied.
Whether that reflects research being genuinely overvalued, or a coordination failure where individually rational budget cuts collectively starved a useful function, remains debated. Both readings are consistent with the evidence.
The Bottom Line
MiFID II unbundling forced buyers to put a price on investment research that had always come free with trading, and the price turned out to be low. Budgets fell, coverage of smaller companies thinned, and research became a cost managers chose to minimise rather than an input they consumed freely with client money. The episode is a general demonstration that the value of anything bundled with a priced product is untested until someone has to buy it alone.