What is Research Worth?

Shanny Basar

Sell-side quotes for basic access to written equity research range from $4,000 to $10,000 per user as asset managers said measuring the value of research is the biggest data challenge in unbundling payments.

MiFID II, the regulations coming into force in the European Union at the beginning of next year, requires the separate payments for research, which have historically been bundled into 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 buyside will also have to track their consumption of research and assess its quality.

Sandy Bragg, Integrity Research

Consultancy Integrity Research Associates said in a report last month that most banks are offering subscriptions for basic access to written research so asset managers can put contracts in place. Integrity said subscription fees for basic level access to written equity research range  from $4,000 per user for large clients to more than $10,000 per user for small clients.

“In some cases like Bank of America Merrill Lynch, banks are quoting subscriptions for higher value services such as analyst access, events and financial models, but other banks like Deutsche Bank are offering premium services on a ‘pay as you go’ basis which would be paid ex post consumption, perpetuating elements of the current broker vote process,” added Integrity.

However in addition to access to basic research, prices can differ depending on the relationship with the fund manager and also the additional services provided such as access to analysts or corporate management.

Integrity gave the example of Deutsche Bank which has proposed charging its European clients for access to its written research by the number of ‘regular readers’, who open a minimum of 26 documents per year.

“Bank of America Merrill Lynch appears to have broken with this approach, reportedly charging between $15,000 per user for large clients and $80,000 per year for smaller clients for packages of premium services,” added the report.

MiFID II extends the need to pay for research from equities to fixed income and the buyside can either pay from their own P&L or charge clients a specific research fee under the Swedish Model.

Integrity said: “We’re told by market participants that many European asset managers might migrate to the Swedish Model because FICC research costs would be low relative to assets under management, but in the meantime many investment houses are planning to pay for FICC research from their P&L.”

The consultancy said  Crédit Agricole has the most transparent FICC pricing of between €10,000 and €60,000.

However some firms have  argued that research that is publicly distributed can be free under MiFID II. Bloomberg reported this month that Denmark’s Danske Bank and Credit Suisse plan to publicly distribute most of their fixed income research so that it can be free.

Sandy Bragg, principal at Integrity Research Associates, said in the report: “European Union concerns of a race to the bottom conflict with the explicit desire of UK regulators to reduce spending on external research.  Banks are caught in the middle, trying to develop fee structures that minimize damage to their research franchises.”

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 at Greenwich Associates, said in the 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.”

Thomson Reuters polled more than 300 buy-side and sell-side participants on a recent MiFID II research unbundling webinar and found that nearly two-thirds, 64%, are working on unbundling or are in the planning stage, with 29% fully or somewhat compliant.

In the poll 58% also 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 and are evaluating vendor solutions.

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.

The Financial Times reported this week that many fund managers are choosing to absorb research costs:

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