The forced unbundling of research and execution commissions is among the most controversial parts of MiFID II that has led both the buy- and sell-side to ask one deceptively simple question; how much does research actually cost?
It seems absurd to think that securities research, something on which asset managers and investment banks spend billions of dollars every year, does usually have a specific price attached to it.
But this peculiar situation has now had its day and, from January, any firm selling research on financial securities will need to have a pricing structure. Some of the first hints regarding pricing have been seen over the summer, with unconfirmed reports that Barclays would charge up to £350,000 per year for its top research package. Barclays has said it doesn’t recognise that figure, but also hasn’t publically commented on how much it plans to charge clients to access its reports and analysts.
While this rather large number hit headlines and raised eyebrows among some, Vicky Sanders, co-CEO of research platform RSRCHXchange, says it would be less surprising to those firms who are already negotiating with the sell-side over their future research needs.
“These amounts probably look much bigger and more alarming to those outside of the industry than they do to most asset managers. Many firms have begun negotiating their new research arrangements with their brokers back in Q4 2016 so they will already be very familiar with the kind of pricing that will be on offer once MiFID II comes into force,” she explains.
“The industry spends some $20 billion per year on equities research globally so when you put it in context, these amounts don’t seem particularly unreasonable,” Sanders adds.
It’s worth bearing in mind that top tier subscriptions to investment bank research will not only include the full range of their research reports as soon as they are published, but also valuable access directly to the analysts to discuss their insight into particular securities. Some firms are likely to push access to their analysts as a major differentiator and premium service, which will inevitably attract a high price tag.
Blair Livingstone, CEO and founder of Street Contxt, a platform for buying and selling research, believes the dividing line between written research and analysts access will become more pronounced once Europe unbundles commissions.
“The cost of written content will be relatively low, but will be used as a way to market the much higher cost to access the person who wrote that content,” he says.
Livingstone predicts tops analysts and those with highly specialist knowledge will be able to command a very high price for their time. Rapid access is also likely to be priced at a premium, such as being able to speak to an analyst immediately after an earnings call.
“Getting insights a day after earnings are announced would be cheaper, wheras speaking to someone within an hour of the earnings call will be far more expensive, there’s a lot of complexity to solve around offering and pricing services,” he explains.
Prices aren’t fixed
As with almost any service sold B2B, negotiation will form an important part of determining the final price the buy-side pays for its research. Even those banks that are now outlining package-deal prices will no doubt have left plenty of room for negotiating those prices down, particularly for those clients they most value. It would be foolish to refuse to hand out a relatively minor discount to a firm with hundreds of billions of assets under management.
“Buy-side and sell-side firms have been negotiating over research pricing since late last year and many are now approaching an end to those negotiations, which should start to give a much clearer picture of pricing in the coming months,” said Sanders.
One trend recently observed by The TRADE, which may give some insight into what the buy-side thinks about hard dollar research pricing, is that a number of firms are declaring they will forgo using commission sharing agreements (CSA) and research payment accounts (RPA), preferring instead to pay for research out of their own funds.
The issue of how to handle separate research payments has been one of the most difficult for asset managers. It was thought that most would prefer to use a CSA/RPA model, which would function similarly to how research is paid for today, as paying for this out of squeezed profits, or through raising client fees, were both seen as being unpalatable.
But with a number of firms, including JP Morgan Asset Management, M&G and PIMCO, choosing to pay for research themselves, it may suggest that the research is not nearly as expensive as they expected it to be, making paying for it from their P&L more achievable than previously thought.
A study conducted by Survation for RSRCHXchange in June found that 23.3% of firms plan to pay for research from the P&L, the largest group other than those that are undecided (which make up 35.8% of responses). Just 8.7% plan to directly charge clients for research, while 10% will use a CSA-like model and 14.2% will operate a mixed model.
The survey also found that firms believe their research budgets will be largely unchanged, with 37% expecting no change in overall research spend. However, 20% of respondents believe research costs will increase sharply.
RSRCHXchange’s Sanders says: “Most firms aren’t expecting a major change in their research costs, but it will vary depending on the type of firm. Smaller managers have historically underpaid and may find their costs rise under unbundling, but larger firms will probably see their research bill fall.”
Regulators seem to believe that, overall, unbundling will reduce costs for asset managers and, ultimately, end investors. When the UK’s Financial Conduct Authority reviewed the use of dealing commissions in research back in 2014, it raised concerns that asset managers were not properly managing research costs and, as a result, paying significantly more to purchase research in a market it considered to be highly uncompetitive as a result of bundled commissions.
As yet however, it remains unclear exactly how much costs will come down as a result of unbundling.
Cost crunch?
Livingston says that, as the research industry becomes more distinct from execution, innovation and competition will begin to influence pricing.
“There are two major factors when it comes to research pricing, how you get the content and the type of content you receive. Distribution is one area where costs are likely to fall because in the past a lot of that was done by humans, but in the future this may become far more automated, but clients will have to pay more for that human touch,” he explains.
Research sales platforms have become far more prominent since MiFID’s unbundling rules were first announced, with many hoping to fill a gap that will enable firms to purchase a wide variety of research from different sources, rather than simply relying on what brokers were willing to give them. While they might rely on investment bank subscription services for day-to-day activity, more specialist research could be purchased on an ad-hoc basis and more competitively than before.
Sanders agrees that the industry is still evolving and warns it could be some time before the full effects of unbundling become clear.
“Setting a price in preparation for MiFID II’s introduction in January will not be the end of this story. It’s a very dynamic and iterative process and it’s likely to take three to five years before the market will stabilise and find its natural price points,” she says.
MiFID II can be seen as creating a completely new market for a very familiar product. As with any new market, it will take time for it to find its feet, become fully competitive and provide pricing that works for both clients and providers.
It won’t be an easy process for many firms and some may have to adapt to not having the same service levels as they previously experienced under the bundled regime. New ways of working may need to be developed and some firms might consider bringing more of their research activities in-house.
However, over the long-term, these changes should result in a more competitive, accessible and diverse research market. Specialist research firms should get more of a look in, as will freelance analysts, while banks will need to rationalise their offerings to make sure they provide genuine value to clients and both sides of the Street will have to take a more conscious approach to their research costs. Ultimately, the end investor should win from all this and ultimately, that’s what the investment industry is all about.