It’s been a week since we all got together in New York for one of the most rigorous debates on research unbundling we have ever seen.

At the core of the difference in opinion is whether there is painless capacity to shrink budgets and market supply, and whether P&L funding leads buy side firms to cut research that contributes to performance or not.

Positions have been drawn and as we get more clarity on the future structure of the US research market, it is clear there will be some friction to get through, but also some emerging best practice from both Europe and the US to point to.

Overall Summary:

430 delegates – 25% Buy side, 30% Sell side, 20% Independent Research, 25% Other

There were two main impressions we took away from the day:

  1. That global asset managers will be paying for research out of their P&L globally in the near future. How soon that happens is unclear, but there was a sense of inevitability. Medium size and smaller firms looked more keen to have the “let’s not risk performance” conversation with end investors, or indeed just hope the conversation never needs to happen at all.
  2. Transparency is the new currency in research. For these relationships to work both sides need to reach a mutually agreed picture of interactions and consumption, and the buy side needs to help providers understand where to invest and disinvest with qualitative feedback. Providers are valued structurally by the clients that show them exactly where that value is being perceived. The regulator said that valuation processes need to address quality and not just quantity, so this helps the market and also addresses compliance.

The notes below are a mix of opinions and comments from panels throughout the day. Any inaccuracies or inadequate paraphrasing is a function of our note-taking – we’ve done our best but do let us know if anything needs correcting!

We’ve grouped them into themes, as well as by panel, both to respect the Chatham House Rules but also to reflect that many topics came up throughout the day. Contradictions in many of these bullets simply reflect very different ways of looking at some tricky issues – we had plenty of debate and it will be interesting to see how things play out before our conference in London on November 12th.


Key Themes:


  1. Current Situation & US Regulatory Landscape
  • The SEC is having lots of discussions and will likely make a decision Q1 2020 on whether, and how, to extend the No Action Relief to give people time to prepare. They will look at Europe for inspiration – for example the upcoming report from the EU on the impact of MiFID II on coverage of SMEs and also on coverage in FICC.


  • In the UK, the regulator will come out in its review highlighting good practices and bad practices. Brexit will increase divergence in Europe. The FCA has taken the strictest stance.


  • Bundling distorts expenditure through costs that are hard to see. Other costs appear in expense ratios. That leads to waste and makes it difficult to look at execution options efficiently.


  • Unbundling is already happening in the US and that’s because asset managers are aware they may be pushed into going P&L. They don’t want to have to jump suddenly without those preparations in place.


  • It’s not clear that clients really think that P&L funding for research is necessary – there are plenty of other ways to achieve transparency.


  • The US feels like where Europe was at a couple of years ago, but with one key difference – there is no cliff edge in the US whereas Europe had the MiFID II deadline. The industry is between the 2nd – 4th innings (baseball!) in terms of the unbundling journey.


  • Last year P&L felt like it was a fait accompli, but much of that pressure has dissipated. From discussion with regulators there is a recognition that the existing system does work and there isn’t a desire to impose it. Then it’s about whether it’s being pushed by the asset manager and their clients, and I think in October 2017 we were hearing that. That is much less the case now.


  • Right now it’s the research price war that is the most uncomfortable aspect of all of this.


  • The US buyside and their clients have time – their interests are aligned so they can figure out the unbundling journey together. They can observe what’s happened in Europe and feed off that.


  • When it comes to P&L it’s much easier to be a good guy if you are a big guy. And with those who have gone P&L you have seen reductions in research spend and are starting to see data and anecdotes on how that affects their access and eventual performance.


  • “In 5 years I hope there will be alignment and transparency. Failure of MiFID II will open a lot of eyes.”


  • Unbundling without MIFID II can work for transparency and performance which is why the SEC isn’t rushing to regulate in this area. Everyone wants interaction data from providers regardless of where they are based.


  • MiFID has failed – look at industry structure. There is a 3.5 bp of drag from research costs. We can debate size of underperformance of Europe vs the US but it’s there. It’s also a 14% hit to profits so you drive consolidation. So if the US doesn’t follow then the US wins.


  • Transparency on research cost could lead to a lot less active investing – is that a victory?


  • If research contributes to alpha then clients should embrace the investment into good research.


  • The retail investor doesn’t have the expertise to understand the nuances of the argument to either go P&L or not.


  • There has been additional transparency from asset managers to their end investors as as result of MiFID II, but there hasn’t been additional transparency on the whole to their providers.


  • It’s still early – there’s plenty of change to come but the one thing we do know is that things are going in a quantified direction and that will be difficult to unpick because it is powerful.


  1. To Pay or Not to Pay P&L


  • In terms of how to pay P&L – most banks do not want to become investment advisors – it could force a change in their business model and that is not desirable.


  • Ring-fencing the European budget creates a dislocation from a regulatory and client perspective. It is difficult to know how to have a conversation with clients where you are treating them differently than clients in other parts of the world.


  • The best solution longer term, given that the journey is going P&L, is to build a glidepath to get there globally. Ring fencing has accelerated that process.


  • Going P&L can encourage you to move to a quarterly in arrears valuation from an annual process. This incentivizes research providers to provide the value – and whilst the PMs have to contribute more, you can build a system that gets their buy-in because they see the positive effects.


  • The number one priority – do no harm to the investment process. And actually how you pay for it is not the point – transparency is the key. You need to run a process where it doesn’t matter whether it is funded by the P&L or the end investor.


  • A move to P&L would have bigger consequences in the US than in Europe and would give an advantage to bigger asset managers. The US has more medium size asset managers than any other region, and P&L funding would hurt them. That effect in Europe is less clear because of the different market structures but also because outside the UK, UCITs funds and other parts of the market are not unbundled.


  • The US rebate model has complexity – and each firm can come to paying P&L through a different solution.


  • It’s not just the sell side concerned about potential deflationary effects of unbundling, it’s also the buy side and the regulator. Asset managers need to make sure they are only cutting out the noise and that comes down to process. Some firms went global in the valuation process on an item by item basis – and this granularity is new for the US market.


  • It helps to have senior management who were in the investment function – yes there is friction between cost and ensuring optimal supply of research, and there are questions and explanations but it is a collaborative effort between finance and the leadership of the firm. They don’t want performance to be an issue for their clients.


  1. Valuation/Consumption of Research & Corporate Access


  • We are in a price and demand discovery process.


  • First job is be compliant. Then involve the front office. Then get a picture through combining qualitative and quantitative factors. Value by consumption is a meaningless constant – after only 3-6 months people start look to improve that approach.


  • The biggest challenge to this is not the administrative burden, it’s actually the relationship management with providers. The size of your wallet doesn’t necessarily mean that your investment teams are going to get everything that they want. You have to work with providers to get more of what you want and less of what you don’t want.


  • When you move from voting in points to voting in dollars the behavioural change is amazing.


  • Price – most brokers have gone for predatory pricing and these are the unintended consequences of an oligarchic market structure.


  • Bottom up valuation doesn’t get to the required payment number at many brokers, so have to add to the service charge if you want and need to be relevant to them.


  • A lot of work has been done on interactions which is now helping transparency, but there are nuances as to which interactions are valuable and which ones are not. While some interactions may not be actionable, does it mean that they weren’t valuable? This is an evolutionary process and we are not there yet.


  • The name of the game is focusing on the quality of the interactions, not sending everything in and hoping you’re going to get paid for it.


  • In Europe procurement people are the people valuing the research. This may not be what was intended by regulators.


  • A PM’s job is to invest and you don’t want PMs on an app rating analysts. Better to centralise that process, but the vote is the best way for them to express that.


  • Moving to real-time valuation per interaction may not be the right way to go because it is often not immediately obvious straight away whether research is valuable or not, and hindsight changes that calculation.


  • When you are sitting on the buy side you are agnostic to the business model of the provider, whether they can subsidise internally or not. We leave the valuation to the investment professional. We give them the money, they allocate it according to who is adding value.


  • The buy side procurement function can use interaction data to understand what PMs need and how they use it. Then you are agnostic to who they use and it’s the vote that drives the value identification. No one else in the chain can guess that value – it’s up to the investment professionals themselves.


  • The valuation exercise as we see it in the market currently is a post consumption exercise. The regulator is asking for an ex ante calculation.


  • Moving to the new process we had in 2017/18 it became more manual, but we always focused on ensuring that we had the transparency to providers we had before and that this process didn’t affect the investment function.


  • It was a challenge to build a model having received very different feedback from various investment teams on how they valued research. We used a vote to attribute value, then we went into negotiations which were difficult in a market that hadn’t been priced before. We didn’t want to go to ultra low pricing because good external research is important to us and we had an eye on the inducement pricing conversation.


  • Where value is being seen we are rewarding it and when it is deteriorating or teams are missing then the money follows the talent. We care very much about talent and care less about the name on the door.


  • A PM will say “I have to consume 100 things for 5 things to actually mean anything to me”. People do need to consume something to understand what the value is. How do you do that in a controlled environment?


  • Some firms have adopted a hybrid rate card – they have rates with a qualitative overlay on interactions and that helps get to a better understanding of pricing.


  • An indicative rate card is useful for firms to bounce off when they make the final payment calculations. Overlay that with interactions and a quality assessment.


  • Be very friendly with your CFO – that relationship is important. They see a big number but you need to do to show the risk to performance. Valuation needs to start looking at impact on the eventual returns of external research providers – having that information will be valuable to the cost discussion with finance.


  • PMs have definitely been more discerning. It’s a shift in behaviour but it is a good thing and is about achieving accountability.


  • It used to be “if nothing changes call me in three months” – but in the new regime how do you value that if you aren’t making calls every week?”.


  • This year pricing is rising.


  1. Managing Budgets & Providers


  • The buy side needs a healthy, robust sell side.


  • It was our belief that the fund manager to sell side analyst dynamic wasn’t broken. It was about controls around that relationship.


  • We pay for sales – with our brokers who are top performing we can see that this is driven by their sales teams.


  • From the sell side perspective just saying you want to cut by X% doesn’t help – if you say we don’t value or want this research from you so will pay X% less in order to just get what we need, that is more constructive.


  • Some firms that went P&L have made sure that the front office could retain control of the budget, and this would not be run by the finance department to avoid negative consequences to the investment function.


  • We don’t need the buffet any more, we don’t need to consume everything from everybody, so don’t send it to us. We will tell you what we require and then you can be more efficient.


  • There has been a value to the efficient identification of necessary research and the culling of the “noise”. It’s hard to quantify precisely but it has been significant.


  • There is a spread between what the buy side and sell side perceive as the value of research and firms are working through a discovery process to get through that.


  • This industry has been over-broked and we are moving to the mean in terms of capacity. There will be fallout. But if you want better service from your required providers then you need to give transparency.


  • The friction is not internally on budgeting – it’s externally with your providers.


  1. Supply of Research 


  • There’s been juniorization in sales coverage overall and there’s been a backlash to that.


  • I wonder how much coverage people really require. If you want to be spoon fed you can choose to be – but maybe you should cut your own meat.


  • Expert networks have been unbundled already, and have already built the systems to deal with transparency requirements on the value of those interactions – ratings etc.


  • The sell side has a new focus on efficient distribution of research – to reach and sell to as many customers as possible. You would expect more marketing of their research product as well.


  • New technology means that single analysts can collaborate as “virtual teams” to provide needed content.


  • There is still a huge incentive for the sell side to produce quality research. There’s no point in having sell side research unless it helps contribute to positive investment outcomes. Everything follows from that.


  • There is a lot of room for innovation in the market for ESG, alternative and big data and MiFID II has only accelerated that by encouraging a focus on what’s valuable and what’s less valuable.
  • There’s also innovation in how the providers create their research in the first place – the data and workflows they are using are becoming more sophisticated.


  • As a sell side firm we must ensure that our analyst teams carry on before – we don’t want the commercial side to impact greatly on what they do. We may have to turn a client off or on and we’ve seen a lot of reshuffling of which clients matter most but we don’t want that to impact product development or innovation.


  • The buy side needs to also tell the sell side what they will need in the future – it is a relationship so we need to know about ESG, Alt Data needs etc.


  • The buy side doesn’t want to share its interaction data with the sell side – there is still a trust issue. But this transparency is key – the sell side is not getting the information it needs to know where to invest and disinvest.


  • Client profitability is a valuable metric for sell side which is increasingly a focus.


  • Quality research is a key concern of ours – we track KPIs – how many names covered by each analyst, and has it changed so they are covering more so they struggle to add the same value per name?


  • Last year $1 trillon globally left active management – providers have to help investors far more with thematic products, because thematic products are relevant to retail investment.


  • There has been more price work in the last couple of years that shows that getting to a price that works for both sides is not as overly complex as originally thought.


  • There has been innovation in AI and data science but it is an area that is difficult to price and reach agreements with clients on. It will look different in two years time.


6) Corporate Access:

  • In corporate access there is a huge behavioural shift. PMs are more thoughtful and selective of the resources they use, who they may want to see and why. Now that some buy side firms have an in-house function it is easier to be more proactive about what they really want and need.


  • Demand for corporate access and expert meetings has only increased. Having multiple people that you need to speak to at one event is a key area of continued perception of value.


  • The data suggest there has been definite consolidation of meetings to fewer buy side players and they tend to be people not under MiFID II that can pay what they want, but these may not necessarily be the investors that the corporate wants to be in front of. In the end the corporate should pay for corporate access.  


  • The corporate is the talent, and the sell side is the agent. What’s the value beyond the logistics charge?


  • There has been a reduction in some sell side firms resource in corporate access and buy side firms are building out their own capacity and their partnerships to ensure they get the access they need.


  • From corporate perspective things are changing in Europe. Because of market abuse regulations and ESG, boards are starting to look at corporate access closely. It’s not just the preserve of the IR team any more.


  • You have to track the quality and attendance at conferences. This is driven by return on the time invested by the investment staff, not for MiFID II. What does the portfolio need, what interactions will help most. Be selective.


  • Corporate access is the only part of the research product that banks don’t own. Who owns it? If you ask the corporate they’d say they do.


  • There’s a disconnect between the US and Europe. In Europe you’re paying for logistics and in the US you’re paying for value. How things pan out will be guided by regulation.


  • Another issue in corporate access is that as the buy side reduces the number of trading counterparties it has, there is an increasing requirement to pay for meetings organised by the brokers that are no longer counterparties. Investors have been forced to put a value on these meetings and pay for them.