Buy Side Challenge: Valuing Research

Shanny Basar

The majority of asset managers said measuring the value of research is the biggest data challenge of unbundling research payments from trading commissions.

MiFID II, the regulations coming into force in the European Union at the beginning of next year, requires the separation of payments for research from trading commissions, in order to increase transparency and reduce conflicts of interest. Asset managers can choose to either pay for research out of their own P&L or from research payment accounts, where they have agreed a budget with their clients. The buy side will also have to track their consumption of research and assess its quality.

Thomson Reuters polled more than 300 buy-side and sell-side participants on a recent MiFID II research unbundling webinar. In the poll 58% identified both measuring the value of research and building a compliant solution as the biggest data challenges according to a report, Solving the MiFID II Research Unbundling Challenge.

Before fund managers can determine the value of research they need to gather data. As a result asset managers are evaluating vendor solutions and the report said requests for proposal tend to cover capabilities in research readership tracking and reporting, entitlements management, qualitative and quantitative value assessment of a research document or service, corporate access tracking, broker voting and integration with standard payments and commission management systems.

“In all likelihood, this vendor evaluation from asset managers is expected to continue well into the tail end of 3Q17,” said Thomson Reuters. “Starting 4Q17 we expect a quick shift in asset manager priorities, from vendor evaluation to rolling out of selected vendor solutions in phases across their global organizations.”

The new regulations have also led to a marked increase in engagement with fintech firms by asset managers according to Mark Whitcroft, founding partner at Illuminate Financial. The venture capital firm was launched in 2014 to investing in fintech companies that provide a clear solution for capital markets.

On a panel last month Whitcroft  gave the example of MiFID II driving Illuminate’s investment in FeedStock, an intelligent information management platform. FeedStock filters, categorizes and tracks investor research using artificial intelligence software, which can be embedded into clients’ internal systems.

The Thomson Reuters poll found that nearly two-thirds, 64%, are working on unbundling or are in the planning stage, with 29% fully or somewhat compliant.

“Market participants remain skeptical about the value of research unbundling, and for now see this as a compliance and regulatory burden,” added Thomson Reuters. “We expect market sentiment to change post implementation in 2018 and 2019, as the efficiency and efficacy benefits begin to surface.”

Consultancy Greenwich Associates has estimated that European equity research and advisory services are worth at least an annual $1.35bn. A survey of 340 European institutional equity investors found they generated an estimated $2.9bn in cash equity commissions for the 12 months to the second quarter of 2017, with 46% spent on equity research and advisory services.

Satnam Sohal, consultant, said in a report: “Capturing a share of that revenue is more important than ever for brokers, since both the total amount of commissions generated on European equity trades and the proportion of that total used for research are shrinking.”

However the study said the industry is currently “remarkably stable” with changes likely at the beginning of next year. For example, the list of 2017 Greenwich Share Leaders in European Equity Trading is virtually identical to that from last year with UBS first, Bank of America Merrill Lynch second and third-place co-winners J.P. Morgan, Morgan Stanley and Credit Suisse all retaining their positions from 2016.

Jay Bennett,  managing director at Greenwich Associates, said in the report: “People are holding off strategic decisions until they get a better idea of how this will play out. Right now, there is a scramble among brokers for insight and data about how investor behavior will change under the new rules – and vice versa.”

Thomson Reuters said the biggest global investment banks and boutique research providers are expected to benefit the most from  unbundling and there will be a proliferation of hard dollar research payments services offering a research-document-only form of service.

“These will assist asset managers in optimizing their research spend, complementing their high touch direct relationships with a few select research providers with some low-to-no-touch research only relationships with other research providers. We expect large research aggregators to play a role in this space,” added Thomson Reuters.

For example, this month Unigestion, the Swiss investment manager, and T. Rowe Price International, the UK-based arm of the US fund manager, both said they will pay for research from their own P&L.

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