Transparent Alignment in Investment Research: From Unbundling to Relational Contracting

29 Pages Posted: 27 Jul 2018

See all articles by Ashby Monk

Ashby Monk

Stanford University

Dane Rook

Stanford University

Neil Scarth

KiteEdge Technologies

Date Written: June 2018


Unbundling fees for financial services – e.g., separating payments for third-party research from commissions for trade execution – is in the long-term best interests of institutional asset owners: it can increase both transparency and alignment with intermediaries, such as external asset managers. Yet how unbundling takes place can be a major determinant of when its benefits for asset owners are realized. That is, for asset owners, long-term gains from unbundling can come at a cost of short- term pain – as recent experiences under MiFID II demonstrate. In this paper, we explore paths for increasing transparent alignment between asset owners and their external asset managers over both short and long horizons. We argue that ‘research budgets’ are a crucial tool to this end, because they could support deeper relational contracts between asset owners and managers. We discuss how emerging lessons from MiFID II show a need for institutional asset owners to take a proactive role in understanding not only their asset managers’ spending on third-party research, but also how that research generates value-for-money in terms of alignment with those managers’ intended investment strategies and processes. More participatory research budgeting could also help asset owners’ relationships with their external asset managers in areas beyond research spending, e.g., in better controlling style drift, monitoring ESG efforts, and doing more rigorous performance attribution.

Keywords: asset management, governance, institutional investing, investment research, MiFID II, relational contracting, style drift, unbundling, value-for-money

Suggested Citation

Monk, Ashby and Rook, Dane and Scarth, Neil, Transparent Alignment in Investment Research: From Unbundling to Relational Contracting (June 2018). Available at SSRN: or

Ashby Monk

Stanford University ( email )

United States

Dane Rook (Contact Author)

Stanford University ( email )

Stanford, CA 94305
United States

Neil Scarth

KiteEdge Technologies ( email )

United Kingdom

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