Challenges for investment banks 2017 (Part 9): Rethinking the Research Function

Beat Monnerat, Senior Managing Director of Financial Services for Asia Pacific; Owen Jelf, Senior Managing Director for Capital Markets; Accenture

This vendor-written piece has been edited by Executive Networks Media to eliminate product promotion, but readers should note it will likely favour the submitter's approach.

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Giving a product away for free in hopes of generating revenue post-consumption is not, and never will be, sustainable but this is exactly the current sell-side research business model.

On one hand, research has become a commoditised product with little differentiation. Aside from unique insights provided by a limited number of specialised boutiques, this kind of research is generally not something the buy side needs or wants. On the other hand, however, research provides a way for investment banks to demonstrate their expertise and thought leadership to potential clients, both primary and secondary.

The situation has been made worse due to regulations created in recent years to separate research from investment banking activities. Before such rules, sell-side analysts often had exclusive access to information deemed material to the business fundamentals of the companies they covered.

The Markets in Financial Instruments Directive II (MiFID II) rules are now designed to separate broking, or trading, from research fees even further and are expected to take effect in January 2018. These rules could have a profoundly negative impact on research revenues. The rules will supposedly alter as well the economics of asset managers' business models, forcing them to pay for research services from their own profit and loss statement, rather than passing costs on to investors through the price of securities.

Faced with the true price of research, money managers will likely scrutinise the research services they purchase, leading to more selective consumption, a flight to quality and declining revenue streams for "me too" research providers. Less research coverage is also likely-especially for smaller, less liquid issues-as banks will be forced to make tough choices regarding their depth of coverage.

The consequences of the MiFID II regulations regarding payment for research are further exacerbated by the fact that money managers face their own margin pressures. The long-term underperformance of many actively managed funds has in general given rise to unprecedented growth in exchange-traded funds (ETFs), and other passive or index products. It is also driving managers to reduce the number of brokers they deal with, in order to cut back on fee and at the same time consolidate their revenue with certain providers as an attempt to create leverage for better service and pricing.

The road ahead 

Investment banks should be availing themselves of digital opportunities to make research profitable again. Fintech is probably the largest threat and opportunity. There are plenty of examples of niche service providers offering unique insights to the buy side in an attempt to generate alpha. Blogs, social networks and message boards are becoming more important. Technology makes it possible to layer analytics and learn which digital contributions are deemed important and credible through artificial intelligence capabilities. Furthermore, it incorporates new data sources to create customised research offerings based on client-directed interests, management styles and demand.

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