Market opinion : Investment research unbundling : Silvano Stagni

DATA WILL TRIGGER THE CHANGE EVERYBODY HAS BEEN PREDICTING.

By Silvano Stagni, Managing Director of PMCR – Perpetual Motion Consulting and Research.

Stakeholders in investment research agree that a lot of the changes to the supply of investment research predicted towards the end of 2017 have not materialised. I believe the need to maximise the use of limited financial resources and usage data will trigger that change.

Earlier this year I had the opportunity to speak to several stakeholders in the investment research area. The general consensus is that large sellside companies and a lot of research consumers have only implemented the minimum change to comply with MiFID II, but the substance is not much different from the way it used to be. The majority of research is still delivered in the traditional way, in other words PDF attachments via e-mail on a subscription basis, but now research has its own contractual framework, completely separate from the provision of execution services. The most common subscription contracts provide the client with a whole catalogue of investment research. Some bill access to analysts separately, some do not.

The vast majority of buyside companies have chosen to use their own funds to pay for research in order to avoid some of the issues associated with the use of client money. Research then becomes a regular cost item with a budget holder, who – at some point – will have to secure a budget for the following year.

 

Matching availability of research with usage, and ultimately with investment decisions, will be used internally to support a procurement decision like any other during conversations with the finance department to define the budget for 2019. That is when a treasurer might wonder why there is a subscription covering 100% of a catalogue of a specific provider when only 10% of the research is actually used. This will be an incentive to request different contractual arrangements.

Collecting this data is not easy. Some ‘switched-on’ providers have regular reports to their clients that specify contacts with analysts, research downloaded, meetings, briefings, etc. Clients will match this data with their own audit trail on usage and with any other (confidential) information that will allow them to associate research usage with investment decisions. This audit trail will be used to substantiate a request for a specific budget for research.

In conversations I had with research providers and research users to prepare for this article, it became obvious that there is still a lot of manual re-entry of information from one system to the other. In an ideal world a CRM system will have all the data that a provider needs to communicate; this information will then be provided to a hub that collects it from various sources. Except it could be complicated to extract data from some CRM systems and there isn’t a hub provider that monitors all the possible relationships on both ends. Most dashboards currently available in the market either monitor things from the research provider point of view or from the one of the user.

Data will facilitate change, or better the implementation of change. It may be complicated for a software provider to develop the exact solution the market wants. However, there are several tools out there that can capture information from structured and unstructured sources. All that is needed is a communication protocol (e.g. FIX), taxonomy, etc. In other words, there may not be a specific solution out there but there is the toolkit to achieve the same results without starting from scratch.

MiFID II rules on unbundling the cost of research may have not triggered the change that most commentators expected simply because information on usage is not really there yet. So, data may not provide all the answers as yet, but once again data and making the best use of budget allocation will provide the trigger for the real change.

©BestExecution 2018

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