(Bloomberg) -- The global fund-management industry may see profitability cut by as much as half if it must pay for equity research that cost investment banks $5 billion last year, according to a report.

The operating margins of asset managers’ active equity firms would fall to 12.5 percent from 23.5 percent if regulators make the industry pay for research now covered by investment banks’ trading commissions, a study released by Frost Consulting & Advisory and Quark Software Inc. said today.

“Asset managers are under pressure to provide greater transparency and accountability,” Neil Scarth, principal at Frost in London, said in a statement. “If they were forced to cover the whole cost of the research, it would have a very significant impact on their operating margins and profitability.”


Regulators are reviewing how equity research is paid for amid concern that customers are unaware how much they spend on reports and execution services. The U.K.’s Financial Services Authority, now split into the Financial Conduct Authority and the Prudential Regulation Authority, wrote to asset managers this year citing failure to control costs and a need to regularly review whether services were eligible to be paid for using commissions.


A ban on trading commissions being used to pay for the research is one option being considered by regulators, Frost said. The prohibition would require institutions to either pay for the research themselves or mandate that asset managers pay for their own reports.


The Investment Management Association, a London-based group representing the fund industry, is due to release a review on research in the next few months. The FCA’s annual asset- management conference is in London this week.


Frost Consulting is a London-based consulting firm specializing in the global equity unbundled commission market. Quark is a Denver-based software publishing company.

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