Unbunding Uncovered USA: Key Takeaways

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.

Join us in New York on June 12th 2019

Defining Best Practice in Research Procurement

See draft agenda here and register here

The investment research industry has undergone a revolution in Europe. Many changes have been good for market efficiency but asset managers also point to negative consequences for the end investor and the industry. How can the US market benefit from the positive trends while ensuring it avoids the pitfalls? Will a global standard of best practice emerge? Now that some US firms have decided to pay for research themselves will we see the rapid shift that happened in Europe in 2017?

400 buy and sellside delegates joined us in London in November 2018 for a day of high quality debate and analysis. We now move to New York to focus on best practices for the buy and sellside – and what the American end investor should make of it all. If US-based asset managers adopt a transparent approach to research procurement will they avoid the European shift to paying for research out of their own resources?

Join us on the 12th June at the Metropolitan Club, New York, to hear industry leaders from the US and Europe discuss the direction and pace of change for the US investment research industry. Panels will cover balancing costs and the need for quality research, research valuation and budgeting, the changes in providers’ business models and their products, corporate access, and operational best practices.

Speakers include:

 Alex Andronov, Global Head of Business Development, Global Research, HSBC

 Elen Callahan, COO Global Debt Research, Deutsche Bank

 Kevin Coleman, CEO, Coleman Research

 Evan Fire, Chief Information & Operations Officer, Pzena Investment Management

Amrish Ganatra, CEO, Commcise

Margaret Hadley, Director, Market Solutions Group – Broker Relations, Balyasny Asset Management

Marc Harris, Head of Research, Evercore ISI

Robin Hodgkins, President, Castine LLC

Stuart Howard, Head of Investment Management Operations, Invesco

Roberta Howett, Research Manager, Man GLG

Michael Hufton, Founder & Managing Director, ingage IR

Howell Jackson, James S. Reid Jr. Professor of Law, Harvard University

 Michael Mayhew, Chairman, Integrity Research Associates

 Sarah Jane Mahmud, Senior Policy Analyst, Financial Services, Bloomberg

 John E. Pflieger, Jr., Global Head of External Research Services, T. Rowe Price

 Henry Price, CEO, Red Deer

 Oliver Pratley, Operations Manager, Invesco

 Cath Rawcliffe, Vice President, Singletrack

 Scott Rosen, CEO, Visible Alpha

Vicky Sanders, Co-Founder, RSRCHX

Indy Sarker, CEO, ANALEC

Terence Sinclair, Global Franchise Director, Citi Research

Neil Scarth, Principal, Frost Consulting

Pamela Torres, General Counsel, Global Investment Research, Goldman Sachs*

Cari Walker, Chief Business Development Officer, CorpAxe

Adam Wreglesworth, Wholesale Conduct Policy, FCA*

Warren Yeh, Head of US, Smartkarma*


See draft agenda here

Join us on November 13th at Unbundling Uncovered..

Defining Best Practice In Research Procurement

See the full agenda here

300 of you joined us in November 2017 for a day of high quality debate and analysis. Now that MiFID II is in effect, come to hear industry leaders debate and discuss how their approaches to research budgeting, valuation and compliance worked out in practice and what needs to change now.

Join us on the 13th November at the IoD to hear how the industry is adapting to the new regulations so you can benchmark your plans and priorities with peers.

Attendance for confirmed buyside delegates is complimentary. Discounted early bird tickets available if booked by October 26th here.

Speakers include:


  • Robert Alster, Head of Research, Close Brothers Asset Management
  • Mark Artherton, Head of Research Content, Smartkarma
  • Travis Barker, Business Manager, HSBC GAM
  • Ross Barret, Capital Markets Specialist, The Investment Association
  • Chris Brown, CIO, IPS Capital
  • Tom Caddick, CIO, Santander Asset Management UK
  • Kevin Coleman, CEO, Coleman Research
  • Chris Deavin, Chairman, Euro IRP
  • Paul Durno, Executive Director, Institutional Equities, Morgan Stanley
  • Simon Edwards, Head of Business Development, BlueMatrix
  • Peter Elwin, Head of Research, Universities Superannuation Scheme Investment Management
  • Amrish Ganatra – CEO, Commcise
  • Roberta Howett, Research Manager, Man GLG
  • Howell Jackson, James S. Reid, Jr. Professor of Law, Harvard University
  • Nicholas Mather, CEO, TS Lombard
  • Michael Mayhew, Chairman, Integrity Research Associates
  • John McGough, MD U.S. Institutional Equities, INTL FCStone
  • Robert Miller, Head of Research, Redburn
  • Oliver Pratley, Operations Manager, Invesco Perpetual
  • Henry Price, CEO, Red Deer
  • Cath Rawcliffe, VP, Singletrack
  • Daren Riley, Head of Business Development, ERIC (Electronic Research Interchange)
  • Scott Rosen, CEO, Visible Alpha
  • Vicky Sanders, Co-Founder, RSRCHX
  • Indy Sarker, CEO, ANALEC
  • Joe Sluys, CEO, SquareBook
  • Alex Stewart, Head of Global Sales and Product Strategy, CorpAxe
  • Christopher Tiscornia, CEO, Westminster Research
  • Lucas Wurfbain, Founder, Feedstock
  • Adam Wreglesworth, Markets Policy Department, FCA
  • Karen Zachary, COO, CRUX Asset Management
  • Richard Ziegler, CEO, CLSA (UK)
    See the full agenda here

Join us in New York on June 12th at Unbundling Uncovered USA

Defining Best Practice in Research Procurement

See Agenda here

The investment research industry has undergone a revolution in Europe. Many changes have been good for market efficiency but asset managers also point to negative consequences for the end investor and the industry. How can the US market benefit from the positive trends while ensuring it avoids the pitfalls? Will a global standard of best practice emerge?

According to Integrity Research Associates, 38% of asset managers not subject to MiFID II plan to use CSAs as the primary research payment vehicle while 19% will pay for research out of their P&L’s or a research charge alongside executions. The recent no-action relief letter from the SEC allows US brokers to take cash payments for research from Europe until mid-2020.

The changes are already happening, what’s unclear is where we are headed.  

300 buy and sellside delegates joined us in London in November 2017 for a day of high quality debate and analysis. We now move to New York to focus on best practices for the buy and sellside – and what the American end investor should make of it all. If US-based asset managers adopt a transparent approach to research procurement will they avoid the European shift to paying for research out of their own resources? What does a transparent process look like?

Join us on the 12th June at the Metropolitan Club, New York, to hear industry leaders from the US and Europe discuss the direction and pace of change for the US investment research industry. Panels will cover the CIO perspective, research valuation and budgeting, the changes in provider business models, best practice in managing CCAs, and technology and platform solutions.


Speakers include:

Radek Barnert, CEO, WeConvene

Ross Barrett, Senior Policy Advisor, The Investment Association

Richard Bove, Chief Strategist, Financial Opportunities Strategy, Hilton Capital Management

Elen Callahan, COO Global Debt Research, Deutsche Bank

Sean C. Davy, Managing Director Capital Markets, SIFMA

Scott Douglass, Executive Director, Instinet LLC

Evan Fire, Chief Information & Operations Officer, Pzena Investment Management

Amrish Ganatra, CEO, Commcise

Jason Glazer, COO, Cornerstone Macro

Francois Gour, Senior Advisor, Frost Consulting

Marc Harris, Head of US Research, RBC Capital Markets

Robin Hodgkins, President, Castine LLC

Stuart Howard, Head of Investment Management Operations, Invesco Perpetual

Michael Hufton, Founder & Managing Director, ingage

Michael Mayhew, Chairman, Integrity Research Associates

Oliver Pratley, Operations Manager, Invesco Perpetual

Henry Price, CCO, Red Deer

Daren Riley, Head of Business Development, ERIC

Vicky Sanders, Co-Founder, RSRCHX

Terence Sinclair, Global Franchise Director, Citi Research

Warren Yeh, Head of US, Smartkarma

Adam Wreglesworth, Wholesale Conduct Policy, FCA

See Agenda here – register here or email us at info@substantiveresearch.com

Join us on November 2nd at Unbundling Uncovered..

Defining Best Practice In Research Procurement

See the full agenda here

300 of you joined us in November 2016 for a day of high quality debate and analysis. With weeks to go before the MiFID II deadline, Unbundling Uncovered 2017 will identify where are you ahead (or behind!) in your preparations, and ensure that your implementation meets the requirements.

Join us on the 2nd November at the IoD to hear industry leaders discuss their reactions to new regulations and benchmark your plans and priorities with peers.

Attendance for confirmed buyside delegates is complimentary if booked by September 8th here, early booking discounts for all other delegates also apply.

Under the new rules fund managers need to set pre-agreed budgets for research payments, provide detailed audit trails of payments made to research providers, and also disclose transparent methodologies as to how they select, assess quality and pay for research. Unbundling Uncovered will allow asset managers to benchmark their plans to comply with the new rules, and provide end investors with the opportunity to understand how the changes will affect them. Will the enhanced-CSA payment model be the norm in 2018 or will firms pay from their own resources, and will it be regulation or competitive pressure that drives the choice? Panels will cover the CIO perspective, RPA best practice, the changes in provider business models, charging for FICC research, and technology and platform solutions.

Speakers include:

  • Julian Allen-Ellis, Director, AFME

  • Robert Alster, Director of Research, Close Brothers AM

  • Travis Barker, Business Manager, HSBC GAM

  • Ross Barret – Capital Markets Specialist, The Investment Association

  • Romain Boscher – CIO Equities, Amundi

  • Andrew Bowley, Head of Regulatory Response & Market Structure Strategy, Nomura

  • Chris Brown, CIO, IPS Capital

  • Amrish Ganatra – CEO, Commcise

  • Patrick Gill – Executive Director, Instinet

  • Shai Hill, Head of European Research, Macquarie Group

  • Dan James, Global head of Fixed Income, Aviva Investors

  • Philippe Lespinard, Co-Head of Fixed Income, Schroders

  • Vicky Sanders, Co-Founder, RSRCHX

  • Rudolf Siebel, Managing Director, BVI German Fund Association

  • Roland Spurr – Equities Business Manager – AllianceBernstein

  • Richard Taylor, Head of EMEA Equity Research, Jefferies

See the full agenda here

6 Key Takeaways from our Research Unbundling Poll

On November 3rd we were lucky enough to have over 250 buy and sell side people in a room that have to make MiFID II research unbundling rules work in practice. Naturally we couldn’t resist picking their brains, and some of the messages were quite surprising. Our thanks to the team at ResearchCentral for making their excellent app available for us to hijack on the day!

Question 1: In 3 years what percentage of the industry in Europe (by AUM) will be paying for research out of their P&L?

We observe extremes of opinion from the buyside here with no consensus, but both the buy and sell side think that less half the market will end up paying from their P&L. The stigma of continuing to charge clients for research is dissipating – if we had asked this in May the answer would have been very different – but that doesn’t mean the P&L option has gone away.

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Question 2: From January 2018 will there be a level playing field across Europe in terms of regulatory structure?

Buy and sell side were almost identical here – two thirds said there wouldn’t be. From conversations at the conference this was driven by the perception that the UK would have stricter rules and stricter enforcement than other European markets.

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Question 3: The most needed market infrastructure is:


Valuation is the priority for both the buy and sell side. (We were delighted to hear that naturally!) Although it’s not clear where the most help is required – tracking and valuing interactions, tracking alpha-generating recommendations, measuring quality and the penetration of research etc. Asset managers are creating processes that need to provide robust justifications for their research procurement, and are looking for solutions right now.

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Question 4: The Buyside will pay for almost no sellside FICC research apart from discounted, high-quality loss leading work from the bulge bracket

We were envisaging a scenario where bulge bracket firms both know that their clients would pay for their FICC research, and are happy to loss-lead with it (not a given by any means). Our audience were asked if they thought the statement above was true – clear difference of opinion here, two thirds of the buyside agreed and more than half of the sellside disagreed. The takeaway here is that the buyside won’t make large new budgets for FICC research and will negotiate hard for what they need. The question is obviously simplistic – firms will make new budget available for niche areas as well, but these budgets may be tiny.

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Question 5: Is a plentiful supply of external research a competitive advantage for hiring and retaining the best people?

It’s unsurprising that the sell side would largely assume that this was the case, but almost half the buy side respondents disagreed. This lines up with many commentators’ assumptions that the research market will shrink – if it doesn’t hurt then why not risk cutting too much rather than too little?

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Question 6: The regulations will provoke a “day of reckoning” between providers and consumers to the benefit of:

Quality providers

We were hoping to learn who has the leverage in the tricky negotiations coming up. Clear message from the buyside here – it’s not them, this process will benefit the “have-to-have” providers. Over half the sellside also admit that this is the case!
We have to include a health warning with these results, some questions had a universe of under 40 respondents. However it was a directly relevant universe in terms of research unbundling implementation.

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Our conclusions from these answers? In both the buy and sell side you have to be really big, or really niche otherwise research unbundling hurts you. Asset managers are sorting out their research valuation processes now, and how that works will drive their negotiations with only the highest quality or most comprehensive providers benefiting.

But what does highest quality mean when beauty is in the eye of the beholder? We have some ideas there – contact us at info@substantiveresearch.com with “Value” in the subject field to set up a call to look at our matching model, we’re keen for as much buyside feedback as possible!

FICC Research: Our Panel’s 7 Key Takeaways

Fixed income research has been the poor cousin in the MIFID2 unbundling consultation/legislative process. To date almost all the attention has been paid to equity research and how the new rules will apply. At our Unbundling Uncovered event on November 3, we discussed this subject in great detail with our panel of experts, from both the buy side and sell side. Here are the 7 key issues raised by that discussion.


1) Increased costs; almost impossible to pass on
Come January, 2018, there will be a new cost line item for investors, and there’s little chance fund managers will be able to claw back that cost from their end- clients. As one global fund manager told our audience, in the current low interest rate environment firms cannot bear this additional cost at a time when the fees they receive from end investors are already incredibly tight and where there is very little clarity about increasing the fees in the future. Passing on the cost of fixed income research will be almost impossible. This will be a major constraint to demand for sell side research.
2) What will still be free?
Very little, according to our panel. This hinges on the interpretation of what constitutes a ”minor-non monetary benefit” (i.e what can still be distributed for free), and what might be considered as an ”inducement” to trade (must be paid for). The latest guidance from the French financial regulator gives the impression that it will take a more benign view on this, while the FCA will be more strict in the enforcement. Some fund managers on the panel bemoaned the lack of clarity on the interpretation and how it should be applied. Consequently, these fund managers said they would prefer to take a very conservative view, and plan to consider almost all the research they receive as substantive, and therefore should be priced. Moreover, sell side banks and brokers will probably tighten/cut off the distribution of free research. Given the way the regulations are being applied across the financial industry, one fund manager argued that there would be little interest from banks in sailing close to the regulatory line and so they will probably police this policy quite strictly.
3) Surely FICC research isn’t an inducement to trade? One panelist explained that due to the poor advocacy in the lobbying process (prior to the delegated acts), there had somehow been a presumption that the inducement regime would apply to fixed income. The logic of how it applies to the equity market is well understood. Whereby, best price is ubiquitous, and where research could potentially be used to channel trading into particular venues, which might be considered an inducement to trade. Panelists agreed that this situation didn’t apply in fixed income, due to it being a principal-based market, where best price is time variant and can change at every moment. Therefore, the requirement for entities to trade on the basis of best price means that it was not possible for fixed income research to be an inducement, the panelists told delegates. So an inducement regime is being applied to a market where one isn’t required.
4) Your sales access just got very expensive
The new rules are also being extended to sales coverage. Any value-added service from sell side sales teams would be considered research, which is set to place constraints in terms of the ability of the buy side to engage with sales people at banks. So the question is not just; Are you going to pay for research? But are you going to pay for your sales coverage and the value added coverage that you require? In the equities market there are sales traders and research sales, and our panelists said the same concept will probably be adopted in FICC, where value-added sales people become part of the research team, and part of the research budget. Panelists say this will be a particular area of contention. Interestingly, said one of the panelists, the interpretation from French regulators is that sales coverage maybe exempt, but in all other jurisdictions it will not be. Some panelists expressed their concern that this could really be a major potential blockage to the level of information flow from the buy side to the sell side, with a negative impact on market liquidity.
5) What are fund managers prepared to pay for?
Hard to say, because it will depend on the asset class. Our fund manager panelists saw this in two ways. Firstly, that one said he would buy niche/specialist research that his firm didn’t cover internally, or didn’t have the expertise in, while another said that where the research was thematically strong and could be broadly applied across a range of asset classes and products, it was easier to justify the outlay. In single-name research, one panelist said that single-name sell side credit research offered little value, and that it won’t probably exist in 5-years time.
6) What’s the price?
Price discovery is cited as one a key factor creating uncertainty in the implementation process, with the banks being reticent to disclose their pricing schedules. The starting point is that budgets will be much lower for fixed income than they are for equities (which will in some cases be part-funded from CSAs). Fund managers were inclined to talk down the monetary value of sell side research, while our sell side participants emphasised the cumulative value of FICC research, arguing that value shouldn’t be assessed on a piece-by-piece basis.
7) Paying US brokers for research directly is prohibited:
 At the moment you cannot pay a US broker for research directly. In order to do so banks will have to become investment advisors, but the liability of banks in doing so is enormous. For the buy side, especially large global firms, the rule causes all sorts of complications. For instance, many global asset managers have analysts spread globally who are all part of the same team. Now they will have to figure out how they can interact with each other when using the advice and information they have derived from the research they have received in areas outside of Europe.

5 Key Takeaways from Unbundling Uncovered ‘16:

Increased Attendance: Up to 280 from 210 last year, the conference program was expanded to a full day of six panels from last year’s four. Attendance stayed strong all day with almost 200 present for the final panel covering the detail of RPA Best Practice!

Greater engagement and participation: Whilst the range of buyside and sellside attendees was similar this year, the participation and level of engagement from within these firms was much greater. The greater attendance of buyside compliance and operations teams reflects the implementation stage firms are embarking on. That is, as firms set up their new research procurement processes (valuation, budgeting, payment and client reporting), the number of stakeholders naturally increases. The questions posed to our panels were much more detailed this year, which we think reflects the key question most firms are grappling with currently. Do they continue to charge end-investors for the research, or put that cost onto their P&L? 

More explicit pricing; nothing is for free: Across our various panels of industry experts there was a general push for explicit pricing (from a compliance perspective), plus an increasing realisation that almost all FICC research will need to be priced and paid for. Whilst the minor non-monetary benefits clause seems to open the possibility for some research to be free, asset managers sounded nervous about the prospect of justifying the consumption of free research on a case-by-case basis. Many panelists agreed that Germany and France will be operating under a less strict system than the UK, which will confuse things even more.

Paying for research outside Europe: Many delegates were concerned about the uncertainty over how to pay for sell side broker research in the US, where research and commission payments remain bundled and where US brokers are prohibited from receiving a payment by law. There was some faith that a solution would be found, and differences of opinion of how likely it would come from a “no-action relief” from the SEC.

A new infrastructure fit for purpose: Can spending money on compliance also provide benefits to portfolio managers? Whilst firms will have to understand that the perfect solution isn’t immediately available given the established ways that research is bought and sold, it was clear that almost all the buyside attendees were investigating using new technology providers to get better performance and competitive advantage.

We will be sending out the results from the polls, summaries of each panel and key quotes over the next few days. To be including in the mailing list please email info@substantivereserch.com with “mail” in the subject field and we’ll include you.

5 things You Need to Know About Regulatory Change in the Research Market

New regulations covering research procurement (taking effect on Jan. 3 2018) will change how portfolio managers and buyside analysts in Europe can access, share and value external research. Therefore we thought we’d shine some light on why your operational colleagues look so stressed and why they want you to make some tough decisions ahead about how you evaluate and consume research

  1. Charging clients for research has become more complex for asset managers 

From much of the early reaction to the FCA’s September 30th consultation paper you’d think that European asset managers were being forced into paying for research themselves. The fact is that they can continue to charge their clients for the research they use within the new Research Payment Account structure. However, a host of new transparency and governance procedures need to be put in place. This piece from Sandy Bragg at Integrity Research Associates is balanced and covers all the main points. Integrity Research Associates: UK Regulators Offer Moderate Interpretation Of MiFID II Unbundling

2. Sell side fixed income research will no longer be free

If a piece of sell side research helps you make an investment decision, then you will need to pay for it. The main issues here are that a) fund managers (and their clients) have not been charged for FICC research until now, and b) all that stuff you received for free and that is considered substantive, now has to be paid for. Not much has been written on this tricky topic. We highlight a Euromoney piece from earlier in the year, but for anything up-to-date you’ll have to come along to the FICC research panel at our November 3 conference. Euromoney: Counting the cost of research

3. Client fairness – the dealbreaker for RPAs?

Asset managers will now have to manage multiple, segregated research budgets. Unless an asset manager is confident that they won’t get sued for sharing research across those budgets, it will have to instead pay out its P&L. We write about this crucial issue here:

 4. European asset managers won’t be able to pay a US broker for research.

Investment research in the US remains bundled. US brokers who want to accept direct payments for research from European asset managers would have to register as Investment Advisors, which they won’t do. The Investment Association covers this issue on page 7 of their “Approach to research under MIFID II” paper, which is accessible for members here.

 5. PMs and analysts need to ”buy in” to this new process to reap the benefits  

The key point in this piece from RapidKD is that without the right stakeholder support any new processes will only fulfill compliance goals. PMs need to embrace the changes in order to realise the benefits of a streamlined process. So get involved! RapidKD: MiFID I implementation in the real world

If you have any comments, questions or suggestions please email us on info@substantiveresearch.com

Client Fairness – the dealbreaker for RPAs?

In our consultations with over 50 buyside firms since May this year it is clear that the stigma associated with continuing to charge end investors for research is dissipating. Both the AMF and the FCA consultation papers legitimised the use of CSAs. Whilst the FCA have added new controls and procedures it is clear that this is a viable funding route, at least theoretically. So what will make more firms join those already paying for research out of their P&L instead?

The areas of greatest concern vary depending on the size and business model of the asset manager you are speaking to. The largest firms talk about managing multiple research budgets, and the dynamic process of moving some of the CSAs funding those budgets to execution-only whilst others continue to allocate to research. Many small and medium size firms cite comprehensive consumption tracking as the largest potential headache.

However if there is one dealbreaker for the RPA/CSA route it is this: a lack of clarity in how much sharing of research is acceptable. Where should buyside firms draw the line and how can they implement the necessary controls?

It may sound sensible to implement a straightforward delineation between published research and any bespoke interaction with a provider. So if a PM takes a bank’s thematic publication into an investment committee meeting the other participants do not have to make the choice between shielding their eyes or passing him a tenner.

However if a PM from a desk which doesn’t contribute to a particular research providers’ bill attends an external analyst’s visit, the research budget his fund is housed within will need to contribute and the interaction will need to be valued.

That may sound terrible in practice, but even this may not work if the end investor doesn’t explicitly agree to this delineation. The legal departments of asset management firms will need absolute confidence that they are not laying themselves open to lawsuits from pension funds that feel they have paid for research that others have benefited from for free.

At Substantive Research we are embarking on a two-month consultation process with pension funds to see if a consensus can be reached on this issue. Once we’ve completed the consultations we will publish our findings as an Appendix to our existing draft RPA Code of Conduct, which will be housed on researchpaymentaccounts.com from December 10th and free to view.

If you have any comments, questions or suggestions please email us on info@substantiveresearch.com