Literally no one knows the true 'value' of equity research, not even the investment banks that are selling it. Up until now, equity research has been treated as a 'freebie' given away to institutional clients in return for trading commissions but that is all about to change thanks to the European Union’s MiFID II regulations, which require asset managers to separate trading commissions from investment-research payments.
Unfortunately, at least for the Investment Banks of the world, while the cost of generating equity research may be substantial, it turns out that the true 'value', as defined by institutional clients' maximum willingness to pay for reports, may be much less. Which is shocking given the creativity required to constantly generate new variations of daily reports politely suggesting that you "Buy The Fucking Dip."
As Bloomberg notes today, the regulatory change slated to take effect next January could cost the I-banks $300 million in fees.
Asset-managers in Europe and the U.S. will probably cut more than $300 million from research budgets in anticipation of regulations aimed at rooting out conflicts of interest in the market for investment information.
That’s according to a survey of 99 fund managers and traders conducted by consulting firm Greenwich Associates, which assessed the shake-up coming to the multi billion-dollar market for investment research over the next year.
The European Union’s MiFID II regulations, which require asset managers to separate trading commissions from investment-research payments, will have a “clearly negative” impact on the amount of commission money that is spent on research and advisory services, according to the Stamford, Connecticut-based firm’s findings released Tuesday. While the budget cuts will be “relatively modest” at individual asset-managers, research providers across the board fear the new law will prompt “a substantial decrease” in buy-side spending.
The findings equate to a 7% drop in overall commission spend for European institutions and a 5% drop in the U.S.. Those reductions would contribute to a nearly $200 million decrease in U.S. research commission spend and a decrease of more than 100 million euros in Europe.
While the rules are technically only applicable within the confines of the European Union, U.S. asset managers with substantial business in the U.K. and Europe are also preparing for the changes and are choosing to adopt global standards. Meanwhile, more than half of U.S. survey participants and almost three quarters in Europe expect the rules to result in a slimming of their counterparty list for research and advisory services. Moreover, 40% of U.S. respondents and more than 50% of European ones expect to limit the number of brokers they trade with.
In response to the changing regulatory environment, Macquarie recently launched a new a la carte product, called "Macquarie Dimension" that allows institutional clients to purchase research reports, managements meetings, analyst calls, etc. on a pay-as-you-go basis. Per Bloomberg:
Macquarie Group Ltd. is trying a new way to charge clients for research: unbundling it.
The Australian bank introduced a service this year that helps solve two problems facing asset managers: they have to trade a lot before getting access to research from big brokers; and regulations taking effect next year will prohibit that kind of arrangement. The new a la carte system, called “Macquarie Dimension,” provides access to research reports, corporate meetings and phone calls with analysts on a pay-as-you-go basis alongside its usual equity-research offerings.
The move is part of a broader trend where specialized financial companies are struggling to find ways to pay for work their clients used to fund with trading piggybacks. The new approach meets Macquarie’s goal of servicing more accounts and monetizing its content, Peter Bentley, managing director at Macquarie Dimension, said in an interview last week at Bloomberg’s New York headquarters.
Bentley sees opportunity in what he calls “regulatory tailwinds” and a chance to service under-appreciated clients. Macquarie isn’t “trying to be particularly disruptive about how people consume research, but we are trying to be innovative in how to commercialize it,” he said.
Of course, as we said before, almost any amount of money seems, at least to us, to be too much to have the same people give you the same advice over and over again, namely "buy more stocks, faster." There, we just summarized 90% of all equity research that will ever be written for the rest of history in 4 simple words and completely free of charge. You're welcome.