Global investment research budgets are showing signs of recovery for the first time since the implementation of MiFID II. This is according to findings by data analytics firm Substantive Research, which indicated that research budgets increased globally during the first half of 2024.

Research Reveals Budget Increase

This positive trend marks a significant turnaround, reflecting growing confidence and demand in the investment research sector. This is reportedly the first notable rise since the introduction of MiFID II, a regulatory framework in the EU, which has significantly impacted research spending patterns.

US research budgets rose by 15% as a proportion of assets under management, while European budgets experienced a more modest increase of 4%. These findings suggest a shift in the long-standing trend of budget cuts and price deflation within the investment research industry.

"Although a modest rise, this fundamentally changes the dynamics of the research market. We are back to a market of winners and losers instead of almost all research providers experiencing price deflation year after year," Mike Carrodus, the CEO of Substantive Research, commented about the findings.

The Financial Conduct Authority (FCA) introduced a Consultation Paper in April titled "Payment Optionality for Investment Research." This paper has led to a debate over whether European asset managers should pass research costs back to end investors, a practice that ceased with the implementation of MiFID II.

Substantive Research’s findings reveal that US research budgets have rebounded more quickly than their European counterparts, allowing US investment professionals to allocate more funds toward external research from brokers and independent providers.

In monetary terms, the global increase in research budgets was recorded at 2.2%. Despite being a modest rise, this shift highlights a change in market dynamics. Some providers are increasing their pricing and seeing greater consumption of meetings and calls with sector analysts.

Brokers Dominate Research Budgets

Brokers still dominate research budgets, accounting for 85% of annual spending, although this figure has decreased slightly from 2023. The concentration of research budgets among the top 10 brokers has also seen a slight rise, moving from 54.8% to 54.9%. This metric will be crucial to monitor as the FCA’s reforms aim to stimulate greater competition within the market.

Substantive Research predicts that spending on analytics and research tooling will accelerate in the 2025 budgeting cycle, with these vendors gaining higher interest and climbing up the provider list.