The Fate of Research (1 of 3)
The research payment account (RPA) is coming. For a 446 page document which has the potential to shake capital markets in Europe, never has so much attention been focused on one word within one paragraph (to the detriment of all the other changes the document outlines).
This word is ‘linked’ <not be linked to the volume and/ or value of transactions executed on behalf of the clients> and it’s inclusion or not in the final technical standards issued by ESMA will determine how you fund the research payment account. For equity investors this will mean they can continue to fund their research account from dealing commissions up to their pre determined budget. For other asset classes traded net or via spread this will have no impact obviously. I am not sure the impact on equity funds merits the lobbying that has been unleashed on this single word – both a monthly fee against the fund and dealing commissions (execution plus research levy) have the same impact on the fund performance for the end client it is just the plumbing, the administration that differs.
The Independent
For better or worse, the world of Independent Research Providers (IRPs) has reached a tipping point. Having struggled with a priced product against a competitor (the banks and brokers) who gave their research away for free perhaps their moment is coming.
The fear that IRPs and their industry body maintain is the potential for an airlock; that asset managers will just stop paying for research while they come to terms with the mechanics. Anecdotally, there appears to be a short term hiatus in taking on new annual subscriptions, whilst managers determine whether their traditional payment methods will still be open in twelve months time. Anything more severe or long term, however, is unlikely to happen for most IRPs. Their customers tend to be at the bigger or more sophisticated end of the client spectrum. During the last year and innumerable meetings with top tier equity houses, I have never had cause for concern that they didn’t understand this or weren’t prepared with contingency plans for all eventualities come the end of the year. Even down to the smaller managers I have only had one manager ask me in a surprised tone ‘You mean I have to set a research budget? Are you sure?’ <cue a rather more abrupt end to the meeting than normal>. Fixed income has been a different story but only with respect to broker research. As I said before, when it comes to paid research, nothing will change for them, it will remain hard-dollar.
Another argument put forward is that banks will price very low, unchallenged by a toothless regulator, and this will push IRPs to the wall. Banks are certainly powerful and not unaccustomed to the occasional act of anticompetitive behavior but it appears the tide has turned for banks. Although some banks no longer put regulatory fines as exceptional items in their accounts, so regular they have become they are regarded by their auditors as a cost of business, banks are beginning to appreciate they have lost this wave of battles in their regulatory war.
To the new wave of independents this must all seem very exciting. Bank analysts have seen their total compensation collapse in the last seven years and come from being regarded as primary business generators and banking remit winners to just another cost base. Any endeavour to innovate in their research, to think differently has been quashed within the death-star they currently work.
In the past year I have seen some of the most innovative, detailed and captivating research in my time on the buy side, from people who have left and started to go it alone, bank rolled by a handful of forward thinking customers.
We also see a number of other parties involved in other areas of research looking to capitalize on the opening up of this closed market.
Does this present a further threat to the existing IRPs? Potentially from some crowding out but a little competition keeps people sharp. Adaptability and willingness to explore new areas of research will be crucial in an unbundled world. The same forces that could crowd the IRP market also hint at its potential expansion. The quality and innovative end of the market that independents see themselves occupying will become increasingly prominent in the face of unbundling. IRPs have the capacity to capitalise on the research budgets currently given to big banks.