The icy wind sending a chill through City’s bruised brokers

Steered by the Financial Conduct Authority, one of the major changes MiFID II will bring is the so-called “unbundling” of costs in a bid for full transparency, separating out trading commissions and research which are currently paid for in one lump sum.

There are few complaints from bulge-bracket banks such as Goldman Sachs and Morgan Stanley — but for small-cap brokers like Stockdale, it is another nail in the coffin.

The City watchdog argued that if the research is of value to fund managers, who are under just as much pressure to cut costs, they will pay for it, and if it is not, they won’t.

“The author behind this idea has clearly never been a small-cap stockbroker,” Mark Brown, Stockdale’s chairman, explains. “Small-cap ideas have to be ‘broked’ to persuade the fund manager to put in the time and effort to properly assess the situation and research is a key part of the process.”

The concept works when you have clients itching to get a view on what Barclays or Glencore shares might do. But how will fund managers ask for analysis of a penny stock, of which there are around 1300 on the main market and AIM, if they have never heard of it in the first place?

Brown’s views are shared by most of the small-cap industry. One of the more pessimistic brokers went as far as to say that 2016 would be a year to adapt or die and MiFID II would spell “extinction” for many.

Panmure’s new chief executive, Patric Johnson, is equally critical of the reduction in analysts’ forecasts.

“If there are brokers that go by the wayside, there are going to be fewer numbers on the street,” he says. “The importance of consensus and numbers on the street cannot be stressed enough and I think there’s an education that needs to happen.”

He believes asset managers will end up paying for research to generate some liquidity, “because that’s the service we will be providing”.

But history tells us that where asset managers can cut costs, they will. In fact, it is already happening. The likes of Aberdeen Asset Management and Baillie Gifford are demanding to pay for research separately.

There is a concern that research will become too biased if it is only written for clients; fund managers already take less notice of reports by house brokers unless there is a telling change in forecasts. The more prevalent this becomes, the more sceptical fund managers are likely to be about all small-cap research.

Rob Mundy, a former research analyst at Credit Suisse and Liberum, has taken advantage of the uncertainty surrounding MiFID II to launch Research Tree, charging private investors for access to usually unobtainable research and giving brokers another revenue stream. Mundy, who has already signed up many of the small-cap names on the circuit, says: “There are genuinely unintended consequences [about unbundling], especially at the smaller end of the market.

There’s a fear that if the money does dry up and the commissions shrink much further, there will be less coverage.” “So what?” you might say. We are talking about bankers after all. But there are wider implications to all this than slimmer wallets for brokers.

One who works in sales and spends most of his time pitching fund managers “the next big thing” is fretting about how Standard Life’s veteran small-cap manager Harry Nimmo (no relation) is falling out of love with AIM. He fears Nimmo is among the advocates of unbundling and therefore likely to read less research. He is probably correct.

While AIM has been a magnet for scandal and branded a “casino”, among other unprintable names, it is also home to some of the UK’s biggest success stories.

The worry then is less research will mean less institutional backing from the likes of Nimmo. Without the early-stage support, unearthing the next Asos might become even more of a lottery.