MiFID leaves researchers scrambling for growth
Research firms eye windfall from new financial rules
LONDON: It’s the persistently ringing phone on Regina Borromeo’s desk that’s showing her the effects of MiFID II.
The head of international high-yield debt at Brandywine Global Investment Management is receiving weekly calls from salesmen at independent research firms promoting their services. Hoping for a windfall from the rules, other researchers including French credit house Spread Research are hiring more analysts and salesmen, while Autonomous Research LLP is testing out a new pay-as-you-go pricing model.
Independent firms are preparing to face unprecedented competition from January when banks have to start charging for research under the European Union’s revised Markets in Financial Instruments Directive.
While some of the analysis firms hope to thrive and are seeking to gain more clients, others may find it difficult to compete with banks and are doing everything they can to keep existing subscribers.
“The big established independent firms may stand to do even better,” said Borromeo whose firm oversees about US$72bil. “But the newer ones have to prove they’re offering something valuable. They’re not all going to make it.”
The new rules, part of a wide-ranging overhaul of financial markets in the EU, are designed to stop investment firms receiving research as a possible inducement to trade.
Asset managers, accustomed to free research for decades, are evaluating what they can afford and whether they can pass the cost onto their clients.
Some banks’ research is so sophisticated it may win clients away from independent firms, according to Gordon Shannon, a money manager at TwentyFour Asset Management in London, which oversees about £10bil.
Specialist companies don’t necessarily have a pricing advantage compared to what the banks are quoting, and some asset managers may choose to hire their own analysts rather than pay for research, he said.
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But the researchers have some advantages over the banks who may be swayed by relationships with corporate borrowers or trading positions they hold. By being independent they can reassure funds that they don’t have to grapple with any conflicts of interests, according to TwentyFour AM’s Shannon.
They’ve also been charging for research for years and that gives them an edge over banks that are still trying to work out what their research is worth. Deutsche Bank AG has halved the price of its fixed-income and macro research to 30,000 euros a year for up to 10 users their prices.
The independent companies may also stand to gain if investors prefer their niche coverage rather than paying for a whole suite of research from banks, according to Steve Kelly, special adviser to the European Association of Independent Research Providers. Second-tier lenders could be forced to close teams, prompting analysts to join existing independent firms or to set up their own, he said.
Other independents are also looking to improve their services amid the uncertainty. Spread Research is planning to more than double its sales force and hire more credit analysts, according to the firm’s senior vice president, Philippe Tastevin, who says they currently employ 15 people in Lyon. Spread Research is also closely monitoring the banks’ prices and is open to undercutting them if needed, he said.
“We are positioning ourselves more aggressively,” said Tastevin. “This is a historical time after competitors also slashed for us to grow the number of clients.”
High-yield debt specialist Lucror Analytics is also hiring analysts and salesmen to boost its team of 17, said chief executive officer Madhav Kapadia. Transparent pricing will help investors “differentiate between research desks on the basis of added value” and potentially drive them to independent firms, he said.
They may be onto something. Chris Perryman at PineBridge Investments says he’s considering research firms where he previously relied on banks. The asset manager has started a trial with macro research company Oxford Economics for a broader view when it drops some bank research.
“Currently we are receiving macro views from about 30 banks,” said Perryman, senior vice president of fixed-income trading at PineBridge which manages about $86 bil. “We may only choose to pay for as few as eight. The jury is still out, but for the better independent firms, MiFID could be a game changer.”— Bloomberg