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Understanding the unbundling of investment costs 

The Markets in Financial Instruments Directive II (MiFID II) is a significant piece of European Union legislation introduced to increase transparency and protect investors. Implemented on January 3, 2018, MiFID II aimed to separate, or "unbundle," the costs of investment research from the execution of trades. Before MiFID II, these costs were bundled together, often leading to a lack of transparency for investors, as they were not aware of how much they were paying for research services provided by brokers. 

Sweden, anticipating the MiFID II regulations, adopted unbundling rules in 2016, providing a unique opportunity to study the regulation's impact before it was widely implemented across Europe. Swedish mutual funds were required to separate their payments for research from trading commissions and report these costs in their financial statements. This early adoption offered a natural experiment to evaluate how unbundling affected mutual fund costs and investor returns. 

Evaluating the impact of MiFID II unbundling 

The primary purpose of this research was to determine whether the unbundling of research and execution costs under MiFID II improved financial outcomes for mutual fund investors. The study aimed to assess whether increased transparency led to lower fees, improved fund performance, or better-informed investment decisions. 

Using a difference-in-differences approach, the researchers compared actively managed Swedish equity funds that implemented unbundling with similar U.S. funds that continued to bundle costs. They collected detailed data on fund commissions, management fees, total expense ratios, and net fund performance from 2013 to 2018. This analysis aimed to provide a comprehensive understanding of how unbundling impacted mutual fund costs and performance in Sweden. 

"A significant challenge we faced was disentangling the effects of unbundling from other regulatory changes and market factors. Ensuring that our findings were robust and isolated to the MiFID II unbundling was a critical aspect of the research," explained Emelie Fröberg. 

Key research findings 

• No significant reduction in fund costs: The study found no meaningful decrease in mutual fund commissions or management fees due to unbundling, suggesting that the regulation did not lead to lower costs for investors. 

• No improvement in fund performance: Despite the expectation of better fund performance due to increased transparency, the research showed no significant impact on net returns for investors in the post-unbundling period. 

• Limited value of transparency: The increased visibility of research and execution costs did not enhance investors' ability to select better-performing funds, indicating that transparency alone may not drive better investment outcomes. 

Rethinking financial transparency regulations 

This research highlights the complex nature of financial regulations and their impact on investors. While MiFID II aimed to protect investors through increased transparency, the findings suggest that unbundling alone did not lead to the anticipated benefits for mutual fund investors. Future research should explore additional measures that could enhance investor protection and fund performance, such as promoting competition among fund managers or improving investor education about cost structures. 

"While the goal of transparency is laudable, our findings suggest that more needs to be done to ensure that regulatory changes translate into tangible benefits for investors. This study underscores the need for a holistic approach to financial regulation," remarked Emelie Fröberg, reflecting on the study's implications. 

Meet the researchers 

• Emelie Fröberg: House of Innovation, Department of Entrepreneurship, Innovation and Technology, Stockholm School of Economics 

• Michael Halling: University of Luxembourg