Vicky Sanders, Co-Founder of RSRCHXchange, highlights the challenges MiFID 2 poses to buy-side and sell-side firms and predicts how the new rules will affect investment research in the next five years.
What will be the biggest impacts the new research unbundling requirements will have on the asset management industry?
The new research unbundling’s rules under MiFID 2 will completely change the culture of research. Currently research is not just a free lunch, it’s a free buffet. Asset managers can read as many reports as they would like and use as much analyst time as they are offered.
Buy-side fund managers and analysts are facing a big culture shock. Under the new rules, their consumption patterns will change since they will have to pay for research explicitly. They will become far more conscientious consumers because they will be required to assign each research report or analyst meeting with a specific cost. In fact, being a highly efficient consumer, generating the best returns for a specified research budget will likely become a strategic advantage, the new Sharpe Ratio and a key consideration for investors and chief investment officers.
Adjusting to the new rules is such a key concern that we conducted a survey of over 560 individuals from 450 buy-side firms; 85% of whom admitted they will not be ready before the final quarter this year.
What is most challenging about unbundling research for banks and brokers?
The first thing that comes to mind is pricing. In our recent survey, we asked the buy-side how difficult it felt it was for the sell-side to price research. Less than 10% said “easy” and 52% said “very difficult.” But I don’t think that’s the biggest challenge for sell-side firms. It’s not easy because banks have never put a dollar sign in front of their services before. Armed with the right market intelligence, the smart people on the sell-side will get it right in the end. However, in our survey, 77% of respondents expect the number of research providers to fall.
The hardest part will be managing clients who decide not to pay for research in fixed income currency and commodities (FICC). FICC sales operate very differently than those in equities. How do you cover a non-research customer and then pick up the phone to a research-paying client? A significant amount of training will be required, or accounts will be split between two different types of sales people, so that clients aren’t mistakenly induced.
With less than six months left to implementation, what should asset managers be doing now?
In the first half of 2017, we saw a shift in priorities. Last year, asset managers were focused on payment methodology. Firms were asking: will transactional Research Payment Accounts (RPAs) work operationally or be too complicated to administer? Can our firm afford to go hard dollar? There was little talk about accounting-method RPAs, although that has changed recently. Perhaps the shift is in response to warnings by the Financial Conduct Authority, or time ticking down to January 2018, but firms are far more focused on how to set a needs-based budget. This requires knowing what you need and being able to move quickly towards consumption tracking so that informed decisions can be made over the next several months.
How will the workflow of fund managers and research analysts be affected?
There’s a good outcome and a bad one. I can imagine a world of laminated sheets listing which banks and providers a fund manager can use for different regional, sector, and asset class coverage. Lists then probably become matrices with service levels and offering menus. The complexity will make it hard for a fund manager to open an email or an analyst to pick up the phone without the risk of being induced by accepting services that weren’t paid for in advance. The FCA has suggested buy-side firms put systems in place where compliance teams can have control over access points. In that world, fund managers and analysts can continue to do their everyday work with the confidence that they aren’t being induced and won’t suffer any hidden charges.
What do you expect the research industry will look like in five years?
The research market will evolve into the combination of a more discerning consumer and more specialized provider. Sell-side firms are looking to new sources of data and technology in order to produce differentiated content. I don’t doubt that there will always be a place for traditional research analysts, but in five years they will be supplemented by new strategies. I also expect to see the rise of the specialist. Operating under tighter budgets, asset managers will be much more selective in the research they consume and will focus on expert analysts in niche areas that they don’t cover themselves.
About Vicky Sanders
Vicky Sanders is co-CEO and one of the two founders of RSRCHXchange, the aggregator and marketplace for institutional research. She has built a markets-focused technology company which is solving for the research procurement and distribution challenges arising from MiFID 2. Prior to setting up RSRCHXchange, Vicky was an Executive Director at Goldman Sachs in the Equity Sales division. She began her career at Merrill Lynch in London, where she worked in Global and European equity sales.
Originally from Boston, Vicky graduated cum laude from Harvard University in 2005, with a degree in economics.
The views expressed in this material are those of the author as of 8/11/17 and may or may not be consistent with the views of Brown Brothers Harriman & Co. and its subsidiaries and affiliates (“BBH”), and are intended for informational purposes only. Neither Brown Brothers Harriman nor its affiliates or its financial professionals render tax or legal advice. Please consult with attorney, accountant, and/or tax advisor for advice concerning your particular circumstances. BBH is not affiliated with Vicky Sanders or RSRCHXchange.