8 months in, MiFID II has started to show its impact in the market. One of the mandates of this new regulation was to unbundle research from trade execution. This mandate was created to bring in more transparency and accountability across the board including how investor money was spent by the investment managers. While some are happily embracing this mandate, others are not so thrilled. This difference in the reactions depends on the side of the investment services you are on. The way it has impacted the buy side is completely different than how it has impacted the research providers.
While the research providers overall are left in doldrums, it is the boutique research providers that have taken the maximum hit due to the aggressive low-ball pricing adopted by most of the big banks. This poses risk to the very existence of long tail of independent research providers who fill the gap for niche and small cap securities that are not covered by the big banks. While the blanket access to the portals of big banks gives a good breadth of research, niche and specific research needs will continue to exist.
Research as such has a great role to play in the broader investments world. External research forms part of core investment decision process in most of the investment management firms. While the chinese walls always existed between research and trade execution businesses at big banks, research typically has always been a cost center funded by the execution/flow business.
MiFID II’s unbundling mandate brings forth a great opportunity for the research as a business to prove itself. However, the market conditions need to stabilize to bring efficient pricing mechanism for research which will also help sustain the boutique and independent research providers.
So the question is, how should research be priced?
Ideally, research should be measured based on its performance. Not all research by same provider or analyst will offer same performance. However, it is rarely that straightforward or common in practice. MiFID II regulation highlights the need for conscious evaluation of research performance. Research evaluation can offer insights into the drivers of performance, accuracy of projections and the strength of underlying assumptions. Failure to do so makes a recipe for unfair and inefficient pricing and risky investment decisions.
What does it mean for research providers?
Investment research is becoming more complex. Today, the research providers are using several novel sources of information and analytics to give themselves the competitive edge. Fundamental analysis is often combined with quantitative approaches to satisfy different client needs.
In this environment, the real advantage for a research can only come from an objective comparison with other research and benchmarks. How did the research perform within a context? or time period?
This regular assessment can help research providers make a stronger case to their clients for price discovery. We are already seeing performance based pricing of research as a model emerging in the market. This assessment in the first instance will enable the providers themselves to understand their strengths and weaknesses, investigate the underlying trends that could generate risk or limit the performance.
As a research provider, failure to evaluate your own research could be damaging.
What does it mean for research consumers?
It is very clear from the beginning of MiFID II that it is the consumers that benefit from this commoditization of research. However, too much of choice also brings with it some challenges.
The real questions for consumers are,
How to choose the research efficiently that can add value to the investment process? How do you accurately assess various research providers without loosing focus on your strategic vision?
Do you evaluate research beyond rating & voting?
Is your research paid according to its performance?
How is research impacting your portfolios?
These questions are vital to create investment strategies that outperform the market while spending the investor money wisely. Whether your strategy are alpha generating or smart beta, you must always make sure that it is based on sound research.
How can Parity One help you?
Parity One was created for helping with providers and consumers of investment research to precisely address the above questions.
This cloud-based platform allows you to monitor the performance of research on a daily basis and let’s you compare research objectively with market benchmarks and other research.
It is very quick and easy to setup research on Parity One and is self-managed after the initial setup. This opens up multiple windows of opportunity for research providers to evaluate and test their own ideas. Built as a model portfolio, research can be compared with other internal or external benchmarks.
Research consumers can use the platform to evaluate the research from various providers and sources to evaluate over a period of time. This can prompt them to not only price it fairly but also identify researchers whom they can bank upon. Advanced modules of Parity One also attribute the performance of investment portfolios to research as a factor at individual research provider. This helps investment managers to prove to their investors the real value of research in the investment process.