These takeaways highlight the main themes running through the panel discussions on the day. Some of the insights may contradict each other, but that’s the nature of debate between the key stakeholders in this market!
1. Regulatory change is coming in 2024/5 – what it will look like is still being formulated.
Rachel Kent, Chair of the UK Investment Research Review, will push for her recommendations to be translated effectively into the FCA’s final rule changes. And the buy side tone towards the imminent proposed optionality on how to fund research budgets has evolved from “this will never happen” to “there are big obstacles, but we should explore this”. Some firms are more bullish, while others are 100% against any reversals in principle and for reasons of their own structures and preferences, so this will be a hard transition to predict accurately in terms of pace and success.
In terms of alignment it is likely that the UK won’t have a regime that perfectly aligns with existing US rules, but perhaps will do in future given the US’s likely direction of travel. July’s expiration of the SEC’s No Action Relief was largely dealt with by brokers taking more payments in Europe or registering as IAs. EU buy side representatives have written to the SEC to say “please don’t take disciplinary action against US brokers until the EU has passed its new laws”.
In the EU there isn’t the same active debate on rebundling as in the UK. The EU Listing Act is the vehicle for rebundling reforms, but these were more a response to pressure from the USA than any push from EU asset managers. It should pass by the middle of 2024, with another 12-18 months before national regulators get it on their books. However, many EU asset managers are comfortable with the current P&L-funded status quo and are more focused on trading restrictions on SIs and bond and equity consolidated tape initiatives.
Many on the buy side are waiting for “the ink to dry” on the detail of the new rules before doing too much, so the pace of implementation at the FCA is key. With annual budgets and cycles it’s a question of whether any changes are in time to consider 2025 budgets or if it’s more a 2026 dynamic. The next steps are the current Investment Association questionnaire process, then the FCA roundtables from the end of November, then the publication of the FCA’s Consultation Paper probably in February/March 2024, followed by the final UK rules expected at the end of June 2024.
What happens if there’s a change of government next year? It was asserted that this is one of the few areas of policy where both parties are largely in agreement.
2. How these new rules will affect the market in practice is deeply uncertain, and much of this hinges on the “client conversation”.
Despite the label of “rebundling”, this seems to be more about the possibility of P&L-funded research costs going back onto end investor clients through CSAs than any real rebundling of execution and research costs. Asking clients to be charged again for research could be difficult, and much will hinge on the existence of new demand from pension funds for new asset classes and SME stocks specifically. Research prices already exist regardless of funding source, so more research money would only enter the market because new assets were being managed.
Some larger asset managers can afford to ensure that their investment function is well catered for, so moving research costs from the P&L may not be as important for them as it might be for smaller firms. However, even those larger managers will consider these freedoms, with the post-MiFID governance and resourcing around research spending creating the possibility to return to asset owners and have the conversation from a place of more confidence in transparency and efficiency.
It was underlined that the FCA needs to understand that RPAs were too complex, and if new disclosure rules are too onerous then any new freedoms will be pointless. Some asset managers would like the UK rules to be more similar to other regimes regarding CSAs, ensuring that alt data, terminals and corporate access could all be paid for from client commissions. Some speakers were trepidatious about managing to convince 80% of their clients, but then what do you do when the other 20% refuse? However others pointed out that there’s no rush this time unlike with MiFID II – the question is whether the lack of a hard deadline makes asset managers less likely to do anything, or in fact the extra time will allow for a gradual transition with more likelihood of success. If one big asset manager does go first at any point then many would be keen to follow, but they would still need time to work through the operational and reporting changes required for a complete change of model.
3. Corporate access is back with a vengeance, at an all time high.
Corporates are going to far fewer NDRs but to more conferences. In New York in September alone there were 90 conferences, and the demand was there to support them. Travel is back, but people are trying to be more efficient while on the road – CEOs and PMs are being particularly picky.
The pandemic-driven habits that pushed investors to be more proactive have continued, and investors now source and request direct access in a way that they didn’t beforehand. They’ve also got used to harnessing technology and can now attend one event whilst keeping up to date with another two events simultaneously. Equally, corporates are becoming more proactive about ensuring that their content is working harder for them as well. Viewership online shows the buy side watching a long tail of conferences – being able to search and filter information from events you haven’t gone to is helping efficiency.
From a regulatory perspective, if the new rules don’t re-categorise corporate access as research (and therefore CSA-able), then in a “rebundled” world European asset managers will continue to be at a disadvantage compared to the US and Asia – European rate cards are much lower. In the current “back on the road” environment, brokers are aware that they can monetise scarcity value, and corporate access could be a key ingredient in stimulating the new demand and liquidity that are the core goals of the UK review. SMEs are struggling to get attention but some are sceptical that new rules will affect them in the near future – they are just so far down the list currently.
Some of the goals of regulatory change next year also target greater retail participation, but with that comes greater compliance risk, which needs to be factored in for any platform or new retail-focused research services. You need to modify content for less sophisticated investors, but you also need to ensure that you are behaving responsibly in how you summarise and format content for them.
4. Technology is changing everything in research already, and how that works in such a people-driven business will be an art as much as a science.
Expectations have obviously risen in how efficiently research consumers can find what they need. Much of this innovation will be driven by the largest buy and sell side firms who have the resources to focus on technology, but other speakers stated that smaller firms also want to take advantage of new tech and find money (as much as possible) to evolve and use new third party solutions. Transcription services for example have grown rapidly, driven by technology that enables search and discovery capabilities. New tech also allows expert networks to find their expert universe more effectively – moving from a LinkedIn profile to actually understanding the knowledge base.
AI has ensured that personalisation of content is now possible – it’s not only “what are you focused on?”, but also “how do you want to consume insights on those assets?”. Equally, when servicing a fund manager, salespeople will now know their “next best action” instead of guessing. AI will drive down the price for maintenance research and that will no longer be produced by an analyst. Scaled summarisation is an important step, but “chat” is the next key stage, enabling firms to ask for what they need directly from a source they can trust and verify. PMs may find the insight they need quickly now, but then they may still want to call the analyst as always!
Some speakers stated that AI may actually make it more challenging to find what you need, not less, as more research will be created by fewer people. You will need to train the users – it’s about asking the right questions. Anonymised content isn’t that useful to a PM and they need to understand the process, latency and provenance behind the analysis that they are consuming. The buy side will look at how much this all helps from an ROI perspective on better decisions, so that will be a clear lens for any potential adoption.
The sell side has a strong appetite for innovation, but will need to know how their work is being used and being redistributed and repurposed. Will we end up in a licensing model much like market data? The IP issues are obviously significant and DoRs are very focused on it, with implications on the specificity of contractual arrangements and the potential ability to monitor how content is being used. Can you prove the provenance of an idea? Maybe AI will have to help with that in order to ensure monetization of the product!
5. Research and Data are becoming increasingly aligned and intertwined.
But market data costs keep rising, demand for new data insights for the investment function keeps growing, and something’s got to give. That might be investing in how the sourcing, consumption and internal allocation and accountability works on the buy side.
As the delineation of research and data becomes more blurry, teams are working closer together. Ultimately consumers want to look at both inputs through the lens of value to the process and profitability. For P&L funders it is all the same funding source and that can simplify decisions and processes. But others highlighted that with index providers and rating agencies increasing prices aggressively YoY, investment into the research and data that actually helps performance could be curtailed.
Research budgets have gone down again this year, while data budgets keep going up. The increase on the data side is driven by the need for more data-driven inputs into the investment process, but also more structural market data costs. Pricing for the “cost of doing business” inputs is especially opaque and increasing materially YoY, driven by provider power where few alternatives exist. The complexity is in the licensing – which is different from research where providers want more people to read their work, whereas in data every new eyeball and requirement has a cost.
Increasingly there will be centralised resources to source and compare supply – it’s all been very reactive until now, with the investment professionals being approached or asking about certain types of data. Accountability helps in controlling costs, and if you show PMs how money is being spent and how they contribute to it then they become much more involved in how to maximise efficiency. Inventory diversification is important but not always an option – wherever you can foster competition it is obviously advantageous. Even when you identify what to do, actually executing is a real challenge.
Large asset managers are targeting integrated consumption and presentation of internal and external research and direct data feeds in order to run AI and ML over it – it’s all content that can contribute to performance.
6. The research valuation and budgeting process is going to become even more important next year.
Buy side speakers said that regardless of how research is funded, they won’t “rebundle” in terms of recombining research with execution. Research valuation will still be based on a combination of interactions and qualitative feedback. Despite the maturity of valuation processes and the increased transparency, there will still always be surprises, especially in a tough market environment. But it helps that providers are now much more capable of predicting how to add value instead of being reactive to vote data.
Sell side speakers welcomed anything that helps reverse the deflationary environment in research, but also do not want a return to a bundled world – they need granular feedback on their analysts that shows them where to invest and where new demand exists. There is now more information inside interaction data than there has ever been – that means transparency between buy and sell side is increasing. Account management interactions have doubled which shows how active the sell side has been in this cycle, and sales service is getting rewarded more again after a big dip post-MiFID II. Brokers are also pushing back much harder now on interaction rate cards where they feel remuneration is too low and where they have scarcity value. This impacts smaller asset managers – they can get coverage, but may use up allocations for direct access very quickly.
In the background to all this US-based asset managers are increasingly unbundling – there is a concerted move to CSAs but without any intention of moving to a P&L-funded model. If there was anything that proved that research transparency makes sense regardless of the funding model then that is it – a robust research valuation process will allow for all eventualities over the next couple of years.
We can analyse all this in detail on June 13th 2024 at the Metropolitan Club in New York – please join us!