Competition for the provision of investment research decreases due to MiFID II: bulge-bracket providers reassert dominance 

London, 14 April 2022: Substantive Research, the research discovery and research spend analytics provider for the buy-side, today published findings of its latest asset management survey identifying recent research pricing trends and expectation for research spend in 2022. They point to a select group of bulge-bracket brokers gaining more power and market share, as market and geopolitical turmoil ensures that the buy-side lean even more heavily on their core brokers. 

Mike Carrodus, CEO of Substantive Research, said: “MiFID II doomsayers predicted that the regulations would make the market much less competitive, and specialist, differentiated research would become less available in times of heightened volatility. What we are seeing now with volatile markets is a stress test proving them right, where we do not have sufficient energy analysts, for example, and asset managers are defaulting to their core relationships, the handful of bulge-bracket firms which dominate market share. There are high quality independent providers who can provide real expertise in these areas, but they are struggling to get paid for their efforts.”

The latest Substantive Research buy-side survey on investment research budgets and research pricing has revealed three key takeaways on how the market has changed in 2021, and a clear prediction for 2022. Here is what our survey found:

– MiFID II has done nothing to alleviate the massive concentration in research budgets going to the core bulge-bracket banks.  In 2019, 52% of research budgets went to the top 10 providers, compared with 51.6% in 2020, only to increase to 53.1% in 2021. This means that the incumbents are actually getting more powerful once again, and that competition has decreased due to MiFID II. 

– Research budgets decreased once again year on year – with US budgets decreasing by the same percentage (11%) as European budgets for the first time. These movements have differing motivations behind them:  with European budgets coming out of asset managers’ P&Ls, the driver is mainly cost control. However, in the US, the moves come from buy-side firms seeking more efficient, mutually valued relationships with a core list that is still longer and better rewarded than the European counterparts.

Spending on ESG research specialists is increasing rapidly, doubling over the last 3 years. However, it has started from such a small base that it still only commands just under 1% of the average research budget, having increased from 0.47% to 0.95% of the average research budget from 2019-2021. So far, asset managers have concentrated their spend on ESG data rather than on external research, where the limited spend has focused on core brokers’ coverage on names in renewable energy, electric vehicles etc. ESG has not created competition in the research market yet, but survey respondents indicate that this is more to do with lack of supply in the right areas, than lack of demand or available budget.  

Predictions for 2022 

During 2022 asset managers will be increasingly focused on where they may be underpaying their research providers – their investment functions need to know they have the access and service available while markets are so volatile. In the words of one broker relations manager, “the ‘cut them until they scream’ approach is no longer a rigorous and appropriate way of understanding if your investment teams are getting what they need! After a while, salespeople give up on clients and concentrate on the relationships that move the needle.”

What’s more – the providers are coming: 70% of survey respondents anticipate cost pressures from the core research providers who are already paid well. Brokers and independents understand that, in this more volatile market and deep uncertainty amid geopolitical turmoil, “have-to-have” research providers gain greater leverage with clients and will use the opportunity to reverse the pricing trends of the past four years. 

Mike Carrodus, CEO of Substantive Research, added: “We have already pointed to a Stabilisation of the Research Brain Drain in 2021, and 2022 will build on this trend, with a small set of brokers continuing to scoop-up quality analysts and increase market share further as their clients rely on good research to help navigate these markets. The bifurcation of this industry continues apace, between those firms investing in and growing their research product, and those that don’t have the revenues or aren’t prepared to subsidise their research departments.” 

Survey sample: 

  • 40 asset managers 
  • 65% Europe, 35% US  
  • AUM range: $2bn – $800bn 
  • 80% Long Only, 20% HF