Frost Consulting has launched FrostRB, a research valuation & budgeting software platform which gives asset managers the ability to establish monetary (dollar) values for specific unpriced research products and construct monetary research budgets that meet MiFID II research spending requirements.
FrostRB offers a transparent and comprehensive research valuation, budgeting and reporting framework that generates highly customised, multi-asset class research budgets down to the fund level, reflecting the fund or strategy’s investment process, style and investment universe.
FrostRB aligns research budgets and actual fund investment processes directly, demonstrably supporting the investment objectives mutually agreed by the asset manager and the asset owner. As a result, FrostRB allows asset managers to maximise ROI on research spending, thereby adding to alpha generation.
Asset managers spend approximately USD 20 billion of their clients’ money (commissions) annually on external research. Historically, the model for research commission allocation has been inefficient and nontransparent, resulting in regulatory change. Current research commission allocation techniques, including imprecise “broker vote” systems, do not support research budgeting at the fund level and do not establish a monetary value for individual research products, as required by current FCA rules. Consequently, research budgets are generally not aligned with investment strategies and fund cross-subsidisation can occur – when an asset owner’s commissions purchase research unrelated to the investment strategy in which they are invested. “Broker Vote” systems can result in overpayment for research that managers intend to use, generate implicit payments for products that aren’t used, and raise cross-subsidisation issues between funds. These unnecessary costs and inefficiencies reduce returns for asset owners.
It is clear that existing practices almost invariably fall short of the MiFID II research spending requirements. MiFID II will require all asset managers in Europe to inform asset owners in advance as to their portion of the anticipated research budget. This suggests monetary research budgeting at the strategy or fund level rather than at the firm level.
The FrostRB research valuation & budgeting software platform, the only solution of its kind, transcends traditional broker vote systems. For the first time, asset managers will be able to transparently demonstrate that they only pay for the research they use. FrostRB’s tailored fund-level research budgets will provide assurance to asset owners that they are meeting their own fiduciary obligations by ensuring that research commissions are being deployed effectively. An asset manager’s ability to demonstrate to clients why and where their research commissions have been spent, and how that has supported the agreed investment process, will be a critical competitive differentiator as asset owners increasingly benchmark asset manager research spending as an adjunct to Trade Cost Analysis (TCA).
Furthermore, MiFID II will require monetary research budgets for all asset classes. FrostRB offers a complete multi-asset class solution that harmonises research budgets between equity and fixed income portfolios for multi-asset products, thereby eliminating cross-asset class research subsidisation.
Neil Scarth (pictured), Principal, Frost Consulting, says: “The institutional investment research market is at the inflection point of the biggest change since the US Securities and Exchange Act of 1934. We are very excited to be launching FrostRB to help asset managers create, and demonstrate, better investment outcomes for asset owners.”
“We are very encouraged by the levels of both interest and uptake in our FrostRB software, as it is the only solution of its kind. FrostRB will drive competitive advantage for asset managers as well as provide greater transparency and accountability for asset owners with an interest in maximising the ROI on their research spend.”