INVESTMENT regulation does not easily grab the attention of clients and private investors, who are firmly focused on performance.

But, the shake-up in stockbroking commissions and investment research coming into effect in January 2018 could impact portfolios. In particular, smaller companies could be hit by the changes.

How should investors prepare?

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The impact on investments could be an unintended consequence of new European legislation called MiFID 2 that aims to give investment clients more transparency on costs.

In principle, it is right that the portion of stockbroking commission that pays for research should be treated as client money, but the new rules have set in train a process that is likely to see reduced research overall and hit smaller companies hardest. This investment sector features in most portfolios of individual investors.

Investment managers will need to budget for research costs more carefully, with full client agreement. In addition to fundamental company analysis by their own in-house research teams, investment firms typically also use information put out by investment banks and stockbrokers. All this helps the stockmarket to assess what the “right” share prices are.

Having share prices that are more right than wrong helps investors in index funds, who take stockmarket prices on trust. And private investors with a stockbroking or share dealing service usually also enjoy some access to research that is not separately charged.

Arguably, there is more research than is really needed and cost can be taken out of the City without any harm to the system. But it may take the new regime time to settle down and some smaller stockbrokers – those more focused on investments in small and medium sized companies - could disappear.

Even access to listed companies by shareholders and potential investors will become more complicated. Investment managers must not only monitor and account for their internal research use, but also who is paying for any costs associated with these regular company meetings. Companies wishing to see their institutional shareholders regularly may in future need to bear the cost themselves, particularly if they are not raising new money.

The ongoing relationship between smaller companies and their institutional shareholders will change. Smaller companies typically do not have enough share trading on the stockmarket to make them attractive to stockbrokers. They may be forced to make bigger annual retainer payments to their corporate advisers to maintain interest.

The change rewards companies that are newly coming to the market or are acquisitive, but businesses that are growing organically without deals are actually what many investors prefer.

The new regime may be particularly difficult for Scottish investment institutions, which rely on companies travelling to Scotland at the time of their results. The biggest investment managers may still be able to get this attention, but arranging company meetings at the company’s expense in Edinburgh or Glasgow will be much harder than in London. It may cut costs out the system, but it is not clear if the new world will be better.

There are some ways in which private investors can benefit from research change. There may be better value in smaller companies, which can emerge longer term. Held over a period of time, the cheapness of the shares may not matter if growing dividends are received or there is an eventual takeover. And, for investors in the Alternative Investment Market there can be some tax advantages. If those privileges remain, there may be ongoing demand for AIM company shares even with reduced research.

UK investors must not only comply with the European legislative framework, but also some tougher implementation set by the UK regulator. Outside Europe, other regulators are watching with interest, but have no plans so far to follow this unbundling revolution.

Time will tell whether the EU has led a global revolution in controlling the dissemination of research, or simply shot itself in the foot. 2018 will bring change for investors and there will be unintended consequences for many portfolios.

Colin McLean is managing director of SVM Asset Management.