06.29.2017
By Shanny Basar

Unbundling Will Boost Boutiques

Gerard Walsh at Northern Trust Capital Markets is from New Zealand and said the removal of protectionism from the country’s dairy industry unleashed a wave of innovation. He believes innovation will disrupt the research industry as regulations in the European Union from next year will require the separation of payments for research from trading commissions.

MiFID II comes into force in January next year and requires fund managers to either pay for research themselves or from a research payment account, where the budget has been agreed with the client. Asset managers can designate a third party to administer the RPA on their behalf but also have to track their consumption of research and assess its quality.

Walsh told Markets Media that some think there is too much capacity in research and unbundling will force an assessment of the value added to the investment process. “To add a lot of value, research will have to include different ways of thinking and more unique, challenging and non-consensual ideas,” he added.

McKinsey & Company also said in a report this month, Reinventing Equity Research as a Profit-Making Business, that banks and broker-dealers will need to change the types of research they provide to focus on services, such as access to analysts and corporate managements, and new forms of information and analytics through big data and artificial intelligence. For example, long-only and hedge fund managers are reportedly hiring data scientists to generate returns from insights from sources such as mall parking lots, social media, and weather satellites, as well as market data.

The consultancy continued that the transformation of research to a free-standing profit center will alter the industry’s economics, and raise some difficult decisions. “McKinsey’s view is that there will be an end to equity research as we know it,” added the report.

Walsh said: “Overall capacity might not decrease but more specialised boutiques may well be set up and it is possible larger firms could sponsor boutiques. For example, technology firms have data and processing power and deep wallets. They could disrupt research.”

He continued that in a few years “passive research” could emerge, where there is automated analysis of quarterly earnings. “The industry may then have a version of bulge bracket provision alongside boutiques,” said Walsh.

For example, Bloomberg reported today that three Barclays analysts in New York have left the bank to start a boutique, Melius Research, ahead of MiFID II.

McKinsey said the consensus amongst banks was an industry-wide drop in equity research revenues of 30% or more over the next three years. The report said: “Independent research providers should see a gain in revenues from current levels, suggesting that the revenue pool for banks and brokers will likely shrink even further.”

A survey from RSRCHXchange said research budgets are expected to be relatively stable going forwards but 77% of respondents expect the number of providers to fall and 80% said they will buy research from less than five bulge bracket banks. RSRCHXchange, an aggregator and marketplace for institutional research, commissioned Survation to conduct an online poll which had 562 respondents from more than 450 asset managers, predominantly in Europe.

Walsh joined Northern Trust last year when the US financial services company acquired Aviate Global, an institutional equity brokerage offering market research and execution services with offices in London, New York, Hong Kong and Sydney.

Mike Vardas, global head of capital markets at Northern Trust, said at close of the acquisition: “We’re looking forward to supporting greater reach of AviateLive, now powered by Northern Trust Securities, a research product designed to drive actionable investment ideas for current and future clients.”

Walsh said sector silos will become less valuable as analysts have to be broader, to be able to spot disruptive themes.

“We have had a theme of ‘Peak Car’ since November 2014 as we could see new ways of accessing mobility which would affect the ecosystem around traditional car manufacturers,” Walsh added. “For example, there are opportunities for manufacturers of safety systems such as smart motorways.”

The RSRCHXchange survey found that 62% of fund managers have set, or are in the process of setting, a research budget.

IHS Markit, the data and analytics provider, today announced the launch of RPA Manager, to help asset managers pay for research under MiFID II.

Tom Conigliaro, IHS Markit

Tom Conigliaro, managing director at IHS Markit, told Markets Media there had been a significant increase in asset managers making decisions regarding research in the last two to three months.

Conigliaro said the majority of asst managers that he has spoken to have chosen to fund research payment accounts on a transactional basis, rather than from their own P&L. Once a trade has been executed the buyside can add a separate research charge to fund an RPA.

However, MiFID II conflicts with US regulation which does not allow US broker-dealers to receive payments for research.

“We have had hundreds of conversations as global asset managers will be able to use an RPA to buy research everywhere expect the US,” added Conigliaro. “Without regulatory relief unbundling cannot exist in the US, which creates additional complexity.

RPA Manager integrates with other IHS Markit research management services such as Broker Vote and Commission Manager. So, it is possible that global asset managers could use RPA Manager outside the US and continue to use Commission Manager in the US for bundled payments.

Other firms have also launched RPA platforms. For example, financial technology provider,Fidessa has partnered with Commcise, a provider of cloud-based commission management technology. Liquidnet, the institutional trading network, has partnered with ONEaccess, a corporate access and research valuation platform. Clients of Liquidnet and ONEaccess offer integrated and customizable dashboard views designed to minimize the manual nature of activities surrounding broker interactions, payments, research evaluation, and trade aggregation.

Conigliaro argued that IHS Markit has a legacy of commission management and RPA Manager can be integrated with the firm’s MiFID II products. RPA Manager will also integrate with the SWIFT payment network.

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