Ultimately, all fees on every trade are worn by the fund manager’s clients or underlying unit holders, which range from the average retail investor to a huge pension fund.

MiFID, though, forced the unbundling of fees to attack the practice of soft commissions.

For example, in the old days, soft commissions might have equalled 0.5¢ on the dollar, and hard commissions 2¢ on the dollar for a bundled fee of 2.5¢ on the dollar.

The legislative demand to unbundle them has resulted in fee pressure in a conceptually similar way to a real estate agent being forced to break down a 2.5 per cent fee charged to a vendor on a $2 million property sale.

If the agent had to unbundle hard and soft fees like marketing, advertising, hours worked, auction services, network, and mates rates, the vendor would likely pay less and the real estate agent industry face pressure.

Areas under pressure

More specific ways that the MiFID legislation has hurt brokers include a now greater obligation to demonstrate “best execution” to regulators.

The principle of best execution is a general fiduciary duty to the end investor to minimise costs. It means a broker or fund manager must have procedures in place to show that a trade order was matched at the best possible market price, or within a minimal variance of the best possible price at the time.

This requirement is not so compatible with traditional practices where brokers took fund managers or their dealers to lunch to build a cozy relationship. In turn, this meant the fund manager (or its dealing room) sent the broker orders irrespective of whether that broker offered the cheapest fees or best market price, with little worry this practice would ever be challenged.

The reach of MiFID does not end there. It means stockbrokers’ buy-side clients must pass on the cost of research to their own clients or unitholders if they agree to pay for it. Many fund managers in Europe don’t want to pay when they have invested in their own in-house research functions.

In Australia, powerful superannuation funds are also increasingly building their own in-house research and asset management functions, which means they’re less reliant on the bundled research and broking services of the sell-side: stockbrokers or investment banks.

This general regulatory tightening has added to fee pressure and lifted compliance costs, especially on smaller stockbrokers that now also face competition from discount startups like Stake, Superhero and SelfWealth.

The budget operators basically run mobile apps as client interfaces and outsource all the trading functions to market makers, with almost non-existent client service functions meaning they can run at far lower costs than legacy stockbrokers formed before the internet.

The investment banking powerhouses have also felt pressure and moved to shutter operations. In October 2019, Macquarie closed most of its cash equities trading businesses outside Asia Pacific in a move it specifically said was in response to structural changes in the broader market.

And Deutsche Bank exited Australia in 2019 as part of a general retreat from cash equities trading entirely.

In Australia, The Corporations Act and ASIC’s Regulatory Guide 223 covers best execution duties to clients, trade transparency, and market integrity obligations for brokers and fund managers.

However, the general obligations are not as onerous as in Europe and likely result in lower compliance costs to imply there’s room for another downturn locally.

Moreover, both the stockbroking and funds management industries are unique in that the more you pay, the less you get, with moves by regulators and competitors to unwind this inverse paradigm continuing to hurt both industries.