Research Access Critical After Unbundling

Shanny Basar

Research access may become a critical driver of absolute and relative performance for active managers when new regulations force the unbundling of research payments from trading commissions according to consultancy Celent.

MiFID II, the regulations coming into force in the European Union in 2018, requires the separation of payments for research from trading commissions. Fund managers will be able to either pay for research themselves or from a research payment account, where the budget has been agreed with the client.

In a new report, Research as a Service, Celent said:  “Much like the fish that doesn’t see the water, the buyside has been swimming in non-priced investment research for so long that it has never considered what it was worth, how much it uses, the level of cross-subsidization, or frankly what it needs.”

The consultancy continued that both the buyside and sellside are currently focussed on complying with the MiFID II requirements but then the long-term focus will have to shift to the commercial implications of how alpha-generating research should be monetized.

John Dwyer, a senior analyst with Celent’s Securities & Investments practice and author of the report told Markets Media: “The initial battle plan always only lasts until the first contact with the enemy.”

Dwyer predicted that unbundling will lead to more fragmentation in  the production of research  as the market shifts from the current oligopoly of big banks to giving smaller boutiques more access to the buyside. “There will be less research produced overall but the research that remains will be of a higher quality,” he added.

His report included the results of polls on MiFID II implementation from the Unbundling Uncovered Conference in November 2016. The polls showed there was no clear consensus on how research will be paid for and whether the buyside will move towards paying for research out of their own P&L.

“There may be a shift to paying out of P&L if markets become more volatile,” said Dwyer. “This gives fund managers more flexibility as it is easier to change their research footprint as conditions change.”

The Unbundling Uncovered Conference found that the need for technology to address research valuation and tracking is the most pressing technology infrastructure requirement. Celent said the Research as a Service approach will harness best-in-class technology to optimize transparency, compliance, and pricing of research. In addition, it combines digital publishing and alignment of incentives to create a network generating actionable alpha.

Colin Berthoud, founding partner at TIM Group, told Markets Media that the buyside currently allocates 40% of bundled commission to research analysts and 20% to sales coverage. Under MiFID II, asset managers can only use client funds to pay for substantive research, which does not cover the majority of salespeoples’ activities.

Berthoud said: “The fallout due to MiFID II may be greater in sales than in research.”

However he continued that some buyside firms have told TIM, a fintech company which provides software to capture investment recommendations, that they will classify trade ideas – a structured long or short recommendation sent by a salesperson to a client – as substantive research under MiFID II.

“Some sales people can adapt to the new environment by sending trade ideas, and therefore have their efforts paid for out of client funds,” Berthoud added. “In Europe, this will mean we will see more substantive research coming out of sales departments as trade ideas, with a further rise in specialist sales, but we may see a significant decline in the relationship salesperson that is unable to send good trade ideas.”

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